LIBRARY 

OF  THE 

UNIVERSITY  OF  CALIFORNIA. 

Deceived        JAN   13    1893    •  l89 
Accessions  No.  £To~tnb    .  Class  No. 


THE 


WORKING  PRINCIPLES 


OF 


POLITICAL  ECONOMY 


IN  A  NEW  AND  PRACTICAL  FORM 


A  BOOK   FOR  BEGINNEES 


BY 


S.  M.  MACVANE 

t\ 
MCLEAN  PROFESSOR  OF  HISTORY  IN  HARVARD  COLLEGE 


NEW  YOKK 
EFFINGHAM   MAYNARD  &  CO. 

771    fipfiAflY-'Av    AND    67    AND    69    NlNTH    STREET 

1893 


COPYRIGHT, 

1890, 
BY  S.  M.  MACVANE 


To  MY  TEACHER  AND  FRIEND, 
PROFESSOR  HENRY  WARREN  TORREY, 

IN  GRATEFUL  ACKNOWLEDGMENT  OF  THE  DEBT  I  OWE  TO  HIS 
LEARNING  AND  KINDNESS, 

THIS  BOOK  IS 
AFFECTIONATELY  INSCRIBED. 


PREFACE. 


THE  aim  of  this  book  is  to  give,  in  small  compass,  a 
sufficient  view  of  economic  doctrine  for  the  ordinary  needs 
of  intelligent  citizens.  I  have  had  two  principal  motives 
in  writing  it.  In  the  first  place,  I  wished  to  show  that 
the  principles  of  Political  Economy  may  be  developed  in 
such  a  form  as  to  bring  out,  more  clearly  than  is  done 
in  the  standard  books,  their  close  and  vital  connection 
with  every-day  industry.  In  the  second  place,  I  wished 
to  suggest  some  modifications,  chiefly  in  points  of  detail, 
of  the  conclusions  commonly  accepted  hitherto  by  the 
leading  economists.  • 

Political  Economy  is  among  th«e  most  practical  of  sci- 
ences, yet  it  has  been  made  to  look  very  much  like  an 
abstract  philosophy.  The  great  writers  seem  to  have 
been  more  concerned  about  the  logical  validity  of  their 
reasoning,  than  they  were  to  keep  their  work,  at  all 
points,  plainly  and  closely  in  touch  with  the  mechanism 
of  practical,  business.  The  result  is,  that  their  readers, 
after  mastering  the  doctrine  as  a  matter  of  abstract 
theory,  are  too  often  quite  in  the  dark  as  to  the  precise 
mode  of  its  application  in  practice.  Economic  truth  can 
hardly  obtain  general  acceptance,  as  the  basis  of  indus- 
trial hygiene,  until  it  is  so  presented  as  to  apply,  directly 
and  without  laborious  interpretation,  to  the  visible  facts 
of  industrial  life. 


vi  Preface. 

In  the  little  book  here  offered,  the  attempt  is  made 
to  work  out  the  leading  principles  of  economics  with  a 
constant  eye  on  actual  affairs.  The  facts  discussed  are 
taken  in  their  ordinary,  observable  form ;  the  student  is 
asked  and  helped  to  analyze  them,  with  a  view  of  per- 
ceiving their  relations  to  each  other,  and  the  underlying 
principles  by  which  they  are  controlled.  The  plan  has 
difficulties  which  the  more  abstract  treatment  avoids ; 
but  I  hope  the  character  of  the  result  may  be  found  a 
sufficient  compensation. 

The  modifications  of  theory  which  I  have  ventured 
to  suggest  grow  naturally  out  of  the  method  I  have  fol- 
lowed. In  all  fundamental  points,  my  results  are  in 
substantial  harmony  with  the  teachings  of  the  older 
economists.  But  in  the  analysis  of  cost  of  production, 
and  in  the  consequent  distinction  between  savings  and 
working  capital,  I  have  ventured  on  an  innovation  which 
seems  to  be  called  for  in  the  interest  of  clearness,  both 
in  the  discussion  of  wages  and  in  the  law  of  value.  In 
the  treatment  of  money  and  prices,  I  have  departed  con- 
siderably, in  secondary  points,  from  the  beaten  track. 
In  developing  the  theory  of  prices,  I  found  it  necessary 
to  have  the  use  of  a  term  which  should  recognize  bank 
deposits  as  an  integral  part  of  the  circulation.  The  term 
"  bank  currency,"  though  not  free  from  objection,  seemed 
on  the  whole  to  be  the  one  most  suitable  for  the  case. 
I  accordingly  adopted  it,  with  the  understanding  that  it 
includes,  on  the  side  of  Notes,  those  issued  by  Govern- 
ments as  well  as  those  issued  by  ordinary  banks. 

In  the  great  question  of  Protection  and  Free  Trade,  I 
have  simply  tried  to  indicate  the  grounds  of  controversy. 
So  long  as  the  Tariff  is  a  political  issue,  it  seems  only 
fair  that  a  book  intended,  in  part,  for  use  in  High  Schools 


Preface.  vii 


should  contain  nothing  offensive  to  either  of  the  parties 
into  which  our  citizens  are  divided. 

This  book  makes  no  pretence  of  being  easy  reading. 
The  subject-matter  is,  I  think,  too  complex,  and  at  some 
points  too  elusive,  to  admit  of  a  treatment  that  shall  be 
at  once  easy  and  adequate.  The  best  a  writer  can  hope 
for  is  that  his  work  shall  be  found  clear  and  instructive 
by  those  who  give  time  to  the  study  of  it.  Not  that 
Political  Economy  is,  on  the  whole,  a  very  difficult  study. 
It  merely  calls  for  some  patient  reflection,  especially  at 
those  critical  points  where  sound  reason  is  opposed  to 
superficial  appearances.  There  is  nothing  in  the  science 
that  young  persons  of  ordinary  ability  may  not  master, 
if  only  they  apply  themselves.  It  would  be  a  happy 
reform  in  our  national  education,  if  a  portion  of  the 
time  that  is  now  spent  by  our  youth  over  barren  puzzles 
in  percentage,  and  the  arid  subtleties  of  formal  gram- 
mar (English  and  other),  were  devoted  to  intelligent 
study  of  elementary  economics.  I  cherish  a  hope  that 
this  little  book  may  do  something  towards  promoting 
such  a  reform. 

CAMBRIDGE,  MASS., 
Dec.  1889. 


CONTENTS. 


CHAPTER  PAGE 

I.     THE  STUDY  OF  POLITICAL  ECONOMY  ...      11 
II.     DIVISION  OF  LABOR  :  EXCHANGE  OF  PRODUCTS  : 

WRONG  VIEW  OF  MONEY  ....          17 

III.  THE  USES  OF  MONEY  :  BUYING  AND  SELLING    .      25 

Questions  and  Exercises 35 

IV.  OF   WEALTH   AND   THE   DISTINCTION   BETWEEN 

NATURAL  WEALTH  AND  WEALTH  PRODUCED 

BY  LABOR 36 

V.     WHY  NATURAL  WEALTH,  ORIGINALLY  A  GIFT  TO 

MEN,     CANNOT     ALWAYS     BE     OBTAINED     FOR 

NOTHING 43 

VI.    OF  LABOR,  AND  ITS  PRODUCTIVENESS      .        .  52 
VII.     NATURE  AND  NECESSITY  OF  CAPITAL         .        .  58 
VIII.     CAPITAL    REPRESENTS     INDUSTRIAL     IMPROVE- 
MENTS         65 

IX.     Two   CLASSES   OF  PRODUCERS,   LABORERS   AND 

EMPLOYERS 72 

Questions  and  Exercises 83 

X.     OF  VALUE  IN  EXCHANGE          ....  86 
XI.     COST  OF  PRODUCTION  AS  THE  ULTIMATE  REGU- 
LATOR OF  VALUE 92 

XII.    EXCEPTIONS  TO  THE   GENERAL  LAW  OF  VALUE  109 

Questions  and  Exercises 120 

ix 


Contents. 


PAGE 

XIII. 

OF  PRICES,  OR  THE  VALUE  OF  MONEY  . 

122 

XIV. 

PRODUCTION  OF  THE  PKECIOUS  METALS     . 

141 

k     XY. 

BANK  CURRENCY         ...... 

150 

*^\ 

XVI. 

QUESTIONS  BETWEEN  GOLD  AND  SILVER     . 

165 

XVII. 

INCONVERTIBLE  LEGAL  TENDER  NOTES  . 

182 

Questions  and  Exercises       ..... 

192 

XVIII. 

WAGES  AND  PROFITS  AS  PORTIONS  OF  THE  PRO- 

DUCT OF  INDUSTRY      

194 

XIX. 

WAGES  OF  INDIVIDUAL  LABORERS 

212 

XX. 

FURTHER   CONSIDERATIONS  REGARDING  WAGES 

231 

XXI. 

PROFITS  OF  INDIVIDUAL  EMPLOYERS 

251 

XXII. 

INTEREST  ON  BORROWED  SAVINGS 

270 

XXIII. 

PRODUCTIVENESS    OF   NATURAL    AGENTS  :   ECO- 

NOMIC RENT         ...'... 

286 

XXIV. 

CONSEQUENCES  OF  DIMINISHING  RETURNS  . 

310 

Questions  and  Exercises  

321 

XXV. 

EXCHANGE   OF   PRODUCTS   BETWEEN   SEPARATE 

COMMUNITIES,  OR  INTERNATIONAL  TRADE 

323 

XXVI. 

FREE  TRADE  AND  PROTECTION    .... 

349 

XXVII. 

CONCLUDING  SUGGESTIONS         .        .        .        . 

364 

Questions  and  Exercises     

377 

APPENDIX 

:  THE  TARIFF  ON  IMPORTS       .... 

381 

SUMMARY  OF  DUTIES          

386 

INTERNAL  REVENUE       

387 

NOTE  ON  ANALYSIS  OF  COST  OF  PRODUCTION 

387 

INDEX  . 

389 

POLITICAL    ECONOMY. 


CHAPTEK    I.  ^ 

THE    STUDY    OF    POLITICAL    ECONOMY. 

1.  Political  Economy  and  Daily  Life.  —  The  general 
subject  of  political  economy  is  wealth,  which  is  simply 
a  short  name  for  the  numberless  things  we  all  like  to 
have  and  to  own.  Everybody  needs  some  wealth  in 
order  to  live ;  most  persoss  are  eager  to  get  a  great 
deal  of  it,  —  more,  perhaps,  than  would  be  good  for 
them,  if  they  got  it.  How  to  get  the  wealth  we  need 
in  the  world  is,  for  most  of  us,  a  very  serious  question* 
Few  therefore,  even  among  young  people,  can  be  en- 
tirely ignorant  of  some  at  least  of  the  ways  by  which 
wealth  may  be  obtained.  There  are  few  who  have 
not  seen  some  kinds  of  wealth  actually  produced. 

Those  who  live  in  the  country,  or  have  even  spent 
their  holidays  there,  must  have  seen  something  of  the 
ways  by  which  a  very  important  part  of  wealth,  namely, 
our  food,  is  produced.  Those  who  live  in  the  city  wit- 
ness the  activity  of  mills  and  factories  and  the  busy 
operations  of  commerce.  We  have  all  seen  men  at 

11 


12  Political  Economy. 


work,  and  know  in  a  general  way  what  labor  accom- 
plishes. There  are  but  few  of  us  who  have  not  seen 
machinery  in  operation,  or  are  ignorant  of  the  powerful 
aid  it  gives  to  human  labor.  Everybody  knows  what 
it  is  to  buy  and  to  sell.  We  are  all  familiar  with  the 
use  of  money,  and  checks,  and  bank-notes.  We  all 
know  the  difference  between  saving  and  spending,  and 
between  diligence  and  sloth.  No  intelligent  person  can 
grow  up  in  a  civilized  community  without  often  hearing 
and  thinking  about  these  matters,  for  they  are  part  and 
parcel  of  our  daily  life. 

Now  these  are  the  chief  topics  of  political  economy. 
The  object  of  the  science  is  to  study  the  conditions 
under  which  we  carry  on  the  struggle  for  the  means 
to  supply  our  daily  wants,  —  the  struggle  for  wealth. 
It  aims  to  discover  the  principles  that  govern  the  pro- 
duction and  sharing  of  wealth ;  the  circumstances  that 
favor  and  those  that  obstruct  the  largest  production 
and  the  fairest  sharing  of  the  product. 

2.  True  and  False  Political  Economy.  —  It  is  at  once 
an  advantage  and  a  disadvantage  for  political  economy 
that  it  deals  with  subjects  that  enter  so  closely  into 
our  daily  life.  The  advantage  is  that  the  science  must 
always  possess  great  interest  for  every  intelligent  lover 
of  his  country  and  his  fellow-men ;  it  can  never  lack 
earnest  and  devoted  students.  The  disadvantage  is 
that  beginners  in  political  economy  are  seldom  wholly 
beginners.  Their  familiarity,  in  practical  ways,  with 
many  of  the  topics  and  questions  of  the  science,— 


Difficulties  of  the  Study.  13 

things  they  hear  and  ideas  they  .pick  up  in  one  way 
or  another,  —  give  them  a  sort  of  political  economy 
before  coming  to  the  set  study  of  it. 

Now  if  this  political  economy  were  good  and  sound 
so  far  as  it  goes,  it  would  save  us  the  necessity  of 
much  elementary  explanation  and  definition.  But,  un- 
fortunately, it  is  for  the  most  part  wrong.  It  is  adopted 
without  sufficient  reflection,  is  not  tested  at  all,  and  has 
usually  no  better  basis  than  half-seen  facts  or  wholly 
misinterpreted  relations  of  things. 

Economic  subjects  are  peculiarly  ill  adapted  for  hasty 
treatment,  being  full  of  pitfalls  for  the  unwary.  They 
often  have,  superficially,  an  appearance  of  great  sim- 
plicity, while  they  are  in  fact  highly  complicated.  The 
motions  of  the  earth  and  its  true  relations  to  the 
heavenly  bodies  are  not  more  effectually  disguised  to 
the  careless  observer  than  are  the  real  facts  of  eco- 
nomic life.  To  pierce  through  the  illusions,  and  gain 
a  clear  view  of  things  as  they  really  are,  demands  an 
amount  of  thought  and  study  that  busy  people  are 
seldom  able,  and  careless  people  are  seldom  willing, 
to  bestow. 

So  it  comes  to  pass  that  popular  political  economy 
is  so  often  erroneous.  So  also  it  comes  to  pass  that 
beginners  in  the  set  study  of  political  economy  have 
usually  much  to  unlearn.  They  have  to  give  up  ideas 
which  they  previously  regarded  as  familiar  and  unques- 
tionable truths.  Much  of  the  space  in  every  book  on 
political  economy  has  to  be  devoted  to  the  refutation 


14  Political  Economy. 


of  false  theories.  In  fact,  the  prevalence  of  wrong 
ideas  is  one  of  the  chief  causes  for  the  existence  of 
political  economy.  If  the  laws  of  production,  wages, 
currency,  etc.,  were  so  clear  and  simple  that  he  who 
runs  might  read,  there  would  be  no  occasion  to  spend 
time  in  writing  or  studying  books  about  them. 

But  it  is  not  only  false  theories  that  beginners  have 
to  unlearn.  They  have  to  unlearn  wrong  ways  of  look- 
ing at  things  and  fallacious  modes  of  reasoning  about 
them.  This  is  more  difficult.  Habits  of  thought  are 
hard  to  shake  off.  Long  after  the  student  has  per- 
ceived the  faultiness  of  his  former  way  of  thinking,  he 
is  apt  to  find  himself  unconsciously  falling  back  into 
it.  Other  sciences  have  no  such  obstacles  to  contend 
against.  In  chemistry,  for  example,  the  student  has 
everything  to  learn ;  but  then  he  has  nothing  to  un- 
learn. He  comes  to  the  study  with  a  mind  open  to 
the  truth,  and  can  advance  from  point  to  point  unem- 
barrassed by  any  relics  of  past  errors. 

3.  Political  Economy  and  Politics,  —  The  fact  that 
political  economy  has  to  appeal  to  reason  in  opposition 
to  appearances,  and  has  to  reject  as  false  so  many  views 
held  by  the  unthinking,  makes  the  spread  of  economic 
truth  slow  and  difficult.  The  close  'connection  of 
economic  questions  with  the  daily  life  and  welfare 
of  the  people  tends  rather  to  aggravate  than  to 
diminish  this  difficulty.  There  must  be  laws  about 
trade,  and  the  currency,  and  banking,  and  taxes.  Now 
men  are  almost  certain  to  disagree  as  to  the  kind  of 


Economic  Questions  in  Politics.  15 

laws  it  would  be  wise  to  pass  in  relation  to  such 
matters.  Thus  in  every  free  country  economic  ques- 
tions often  become  political  questions.  This  view  or 
thaU  principle  becomes  the  rallying-cry  of  a  party.  In 
the  debates  that  ensue  men  are  prone  to  seek  argu- 
ments rather  than  the  truth,  and  political  success 
rather  than  the  public  welfare.  In  such  contests  it  is 
unfortunately  true  that  sound  and  just  principles  are 
often  difficult  to  explain  and  uphold  in  opposition  to 
false  and  glittering  theories,  that  seem  to  be  more 
in  harmony  with  daily  observation. 

Fallacies  exist  only  because  false  doctrine  often  looks 
truer  than  the  truth.  As  political  economy  has  many 
such  strongly  entrenched  fallacies  to  expose  and  refute, 
and  has  to  run  counter  to  the  cherished  opinions  of 
large  classes  of  men  in  relation  to  subjects  that  in- 
terest them  deeply,  it  is  inevitable  that  it  should  be 
regarded  by  many  as  a  tissue  of  idle  dreams,  or  even 
something  worse. 

The  science  has  also  suffered  from  the  denunciations 
of  benevolent  enthusiasts  whose  schemes  for  the  im- 
provement of  the  world  it  has  had  to  oppose.  Well- 
intending  visionaries  take  it  amiss  to  be  reminded  of 
the  hard  realities  of  life.  The  offence  of  political 
economy  is  that  it  insists  on  getting  at  the  true 
causes  of  the  poverty  and  misery  that  are  so  sadly 
prevalent  in  the  world.  It  rejects  all  remedies  that  do 
not  address  themselves  to  the  seat  and  source  of  the 
disease.  For  this,  eloquent  enthusiasts  have  denounced 


16  Political  Economy. 


it  as  "the  gloomy  science,"   and   an   enemy  of   human 
progress.     They  have  no  doubt  turned  many  against  it. 

Yet  political  economy  is  but  reason  and  common 
sense  applied  to  practical  affairs.  It  has  made  ^reat 
progress  in  the  last  hundred  years,  and  is  steadily,  if 
slowly,  winning  its  way  to  general  acceptance.  Even 
in  quarters  where  it  is  rejected  as  a  system,  many  of 
its  most  important  principles  are  followed  in  practice. 


CHAPTEE    II. 

DIVISION    OP    LABOR. -EXCHANGE    OP    PRODUCTS. - 
WRONG    VIEW    OF    MONEY. 

1.  The    Struggle    for    Money.  —  The   source   of   many 
wrong  theories  about  economic  subjects  is  found  in  the 
use  of  money  in  business  transactions.     Money  is  exceed- 
ingly important  to  us  in  practical  ways,  and  at  the  same 
time  hard  to  get.     To  a  superficial  observer  the  struggle 
of    life    may   well   seem    to   be   a   struggle    for    money. 
All   our   gains,  and   the  worth   of   all   our   possessions, 
are  expressed  in  money.     The  man  who  has  plenty  of 
money  is  regarded  as  rich ;   the   man  who  has  none  is 
regarded  as  poor. 

Industrial  labors  of  all  kinds  are  apt  to  be  thought 
of  merely  as  ways  of  getting  money.  The  laborer  who 
works  in  the  factory  or  in  the  field ;  the  employer 
who  plans  aM  directs  the  work ;  the  merchant  who 
buys  the  product  and  sells  it  again ;  the  builders  of 
houses  and  ships  and  railways ;  the  inventors  of  ma- 
chinery and  the  owners  of  land, — all  seem  to  exert 
themselves  only  for  the  sake  of  the  money  they  hope 
to  get  in  return. 

2.  Money   not    Useful    in    Itself.  —  Now   this    view  of 
industrial  activity,   though  natural   and   convenient    for 

17 


18  Political  Economy. 

practical  purposes,  is  totally  false  and  misleading  when 
used  as  the  basis  of  economic  theories.  The  first  step 
in  the  study  of  political  economy  is  to  gain  a  larger 
and  truer  view  of  industrial  operations.  One  who  re- 
flects a  little  will  perceive  that  money,  in  and  of  itself, 
has  no  qualities  that  should  make  it  an  object  of  uni- 
versal quest.  It  is,  in  truth,  the  one  form  of  wealth 
that  has  no  independent  use  for  us.  Every  other  thing 
is  useful  in  itself;  money  is  useful  only  as  a  means  of 
getting  other  things. 

If  some  unseen  power  were  suddenly  to  deprive 
everybody  of  all  things  that  are  good  to  eat  or  to  drink 
or  to  wear  or  to  enjoy  in  other  ways,  leaving  even  a 
most  liberal  price  in  money  for  everything  so  taken 
away,  it  is  easy  to  see  that  .the  money  would  not  save 
us  from  cold,  hunger,  and  misery.  Money  is  useful 
only  where  we  can  get  other  things  in  exchange  for 
it,  —  useful  only  when  we  part  with  it. 

3.  Division  of  Labor, — Why,  then,  are  men  so  much 
concerned  about  money?  Why  care  for  it  or  use  it  at 
all  ?  In  order  to  answer  these  questions  we  must  con- 
sider a  point  of  the  very  highest  importance  in  actual 
life  as  well  as  in  political  economy.  Civilized  life  de- 
mands the  use  of  many  different  commodities.  One 
has  only  to  think  of  the  various  things  a  person  in 
ordinary  circumstances  makes  use  of  in  the  course  of  a 
single  day,  in  order  to  perceive  how  great  the  number 
and  variety  of  commodities  necessary  for  comfortable 
living. 


Division  of  Labor.  19 

Now,  no  one  person  could  possibly  succeed  in  making 
so  many  things.  Life  is  too  short  to  learri  the  way  of 
making  even  a  small  part  of  them.  If  each  person 
were  limited  to  the  things  he  could  produce  for  himself, 
we  could  never  rise  above  the  condition  of  rude  bar- 
barians. Civilization  is  possible  only  by  dividing  up  the 
work  of  production,  —  by  arranging  that  each  producer 
shall  make  enough  of  one  commodity  for  a  considerable 
number  besides  himself.  This  is  called  Division  of 
Labor.  The  following  great  advantages  are  gained  by 
the  use  of  it. 

4.  Advantages  of  Division  of  Labor.  —  (a)  A.  great 
saving  of  time  in  learning  how  to  make  things.  There 
are  but  few  things  that  can  be  made  properly  without 
some  degree  of  skill  and  special  knowledge.  Skill  can 
be  acquired  only  by  practice.  All  fine  and  compli- 
cated products  require  much  skill  and  knowledge : 
years  of  practice  are  necessary  for  learning  the  art  of 
making  them.  If  every  man  had  to  learn  the  art 
of  making  shoes,  for  example,  merely  in  order  to  supply 
his  own  need  of  them,  one  can  readily  see  how  great 
a  waste  of  time  there  would  be.  By  arranging  that  one 
man  shall  learn  the  art,  and  shall  make  shoes  for  many 
others,  a  great  saving  is  effected  in  the  work  of  learning. 

(b)  A  man  who  devotes  himself  to  the  production 
of  one  thing  learns  the  art  of  making  that  one  thing 
thoroughly.  He  learns  all  about  the  materials  and 
tools.  He  seldom  wastes  time  and  materials  by  bung- 
ling. He  learns  to  turn  everything  to  the  best  account. 


20  Political  Economy. 

Thus  lie  is  able  to  make  a  better  article,  and  to  make 
it  more  quickly  than  would  be  possible  for  one  who 
had  to  divide  his  time  among  many  different  kinds  of 
production. 

(c)  Division    of    labor    enables    each    person    to    do 
the    work   for   which   he    or   she  is  best  fitted.     Those 
who  have  great  muscular  strength   and  endurance  can 
do  the  kinds  of  work  in  which  strength  and  endurance 
are   necessary.     Those  who    have  deft  fingers  and.  deli- 
cate   taste    can    devote    themselves    to    occupations   in 
which  there  is  need  of  taste  and  dainty  workmanship. 
Thus    division  of  labor   enables  all  the    talents    of   the 
community   to    be    turned    to    the   best    account.      The 
result    is    to     increase     production     and     improve     its 
quality,  besides  promoting  in   other  ways   the   comfort 
and   happiness  of   the   producers. 

By  an  extension  of  the  principle,  people  living  in 
different  parts  of  the  country  are  enabled  to  make  full 
use  of  the  natural  advantages  which  their  neigh- 
borhood possesses.  Thus  local  peculiarities  of  soil 
climate,  water-power,  mineral  resources,  etc.,  become 
available  for  supplying  the  needs  of  the  people  living 
in  other  places. 

(d)  Division   of  labor   makes  the   use  of   machinery 
possible.     No   man    would    build  a  cotton-mill  in  order 
to  make  cotton  cloth  for  his  own  family.     There  would 
be   no  saving    of    labor    in    doing    so.     When    the    mill 
can  be  used  to  supply  a  whole  city  or  a  whole  country 
the  case  is    different.     It  then    becomes    the    means  of 


Division  of  Labor.  21 

saving  a  great  deal  of  labor ;  or,  better,  of  adding 
greatly  to  the  productiveness  of  labor.  By  division 
of  employments,  and  the  machinery  it  makes  possible, 
men  are  enabled  to  use  the  forces  of  nature  with 
great  effect,  as  aids  in  production. 

(e)  Division  of  labor  is  applied  with  great  advan- 
tages to  the  different  parts  or  stages  of  the  production 
of  things  that  are  made  up  of  several  different  materials, 
or  go  through  a  number  of  different  processes.  For  ex- 
ample, take  the  production  of  penknives.  For  making 
the  blades,  iron  ore  must  be  dug  from  the  earth ;  then 
it  must  be  smelted  and  turned  into  steel ;  then  it  must 
be  cut  up  and  beaten  into  the  required  shapes ;  then 
each  piece  must  be  ground  and  polished.  Each  of  these 
operations  is  distinct  from  the  rest,  requiring  different 
tools,  a  different  kind  of  skill,  and  a  different  sort  of 
place  for  carrying  it  on. 

Again,  the  production  of  the  handles  is  an  entirely 
different  sort  of  work  from  that  of  making  the  blades, 
and  is  itself  broken  up  into  several  distinct  operations. 
There  is,  therefore,  the  same  reason  for  subdividing  the 
work  of  making  penknives  that  there  is  for  division  of 
labor  in  producing  different  commodities.  The  only 
difference  is  that  here  the  different  sets  of  laborers 
co-operate  towards  the  production  of  a  single  com- 
modity. This  difference  has  led  some  to  distinguish 
this  sort  of  division  of  labor  by  a  separate  name :  viz., 
Combination  of  Labor. 

Whatever  we  call  it,  the  important  thing  to  be  clear 


22  Political    Economy. 

about  is  that  the  production  of  all  complicated  articles 
is  greatly  cheapened,  and  the  quality  greatly  improved, 
by  dividing  the  work  of  making  them  among  a  number 
of  different  sets  of  laborers. 

5.  Necessity  of  Exchange.  —  Enough  has  been  said,  it 
may  be  hoped,  to   suggest  the    great    power  of  division 
of   labor   to    increase    the    productiveness    of    industry. 
But  obviously  production  of  things  by  division  of  labor 
has  the  awkward  result  of  leaving  them  in  the  wrong 
hands  when  they  are  finished.     Nobody  has  the  things 
he   needs ;   everybody  has,    instead,  a  great   stock    of  a 
single  article.     In   order  that  all  persons  shall  get  the 
things   they   need   for   their    own    use,  a   most   compli- 
cated set  of   exchanges   must  take   place.     This    is    the 
one  serious   drawback   in  division   of   labor :    it   is   the 
price  we  pay  for  all  the  advantages. 

6.  Exchange   by   Barter:    its   Difficulties.  —  Now  it  is 
at   least    conceivable   that   the    producers   should   meet 
each  other  at  appointed  times  and  places,  and  exchange 
products  one  with  another.     In  a  very  small  community 
this  might  perhaps  be  done.     But  one  readily  sees  that 
exchange  of  products  conducted  on  that  plan  would  be 
very  laborious,   if   not   quite    impracticable,   in    a   large 
community. 

Two  very  great  difficulties  would  be  encountered.  In 
the  first  place,  the  man  who  has  produced,  we  will  sup- 
pose, a  carriage,  and  wishes  to  get  in  exchange  for  it  a 
watch,  a  coat,  and  a  barrel  of  flour,  must  find  a  man 
who  not  only  wishes  to  get  a  carriage,  but  also  has  a 


Exchange  of  Products.  23 

watch,  a  suit  of  clothes,  and  a  barrel  of  flour,  —  all  of 
the  kind  desired,  —  to  give  in  exchange  for  it.  Since, 
under  division  of  labor  the  man  who  wishes  the  car- 
riage has  presumably  but  one  commodity  to  offer  in 
exchange,  and  that  one  commodity  would  rarely  happen 
to  be  one  of  the  things  needed  by  the  carriage-maker, 
we  readily  see  how '  awkward  the  situation  would  be. 

Exchange  by  direct  barter  between  producers  would 
involve  so  much  trouble  and  so  great  risks  of  failure, 
that  the  whole  advantage  arising  from  division  of  labor 
might  be  lost  thereby. 

7.  A  Central  Exchange,  —  The  only  plan  by  which 
barter  could  be  made  possible  in  practice  would  be  to 
have  some  very  wealthy  man  or  company  undertake  the 
business  of  making  the  exchanges.  The  undertaking 
would  be  a  vast  one.  A  stock  would  have  to  be  kept  on 
hand  of  all  the  various  commodities  that  people  want, 
including  many  different  sorts  and  qualities  of  each  com- 
modity; and  not  merely  a  single  specimen  of  eacli 
thing,  but  so  large  a  supply  of  it  that  all  persons  in 
the  community  could  get  access  to  it  and  obtain  the 
desired  quantity. 

The  universal  exchange,  we  may  assume,  would  have 
to  be  about  as  large  as  all  the  present  shops  and  ware- 
houses put  together.  Probably  the  management  of  so 
vast  a  business  would  exceed  human  capacity.  To  say 
nothing  of  the  knowledge  of  all  articles  of  trade  that  the 
business  would  call  for,  the  mere  size  of  the  establish- 
ment and  the  extent  of  its  operations  would  render  the 
supervision  of  it  exceedingly  difficult  if  not  impossible. 


24  Political    Economy. 

8.  Difficulty  of  Exchange  without  a  Standard  of  Value.  — 

But  supposing  these  difficulties  to  be  overcome,  there 
would  remain,  in  the  second  place,  the  problem  of  find- 
ing some  ready  way  of  expressing  the  proportions  in 
which  things  should  exchange  for  each  other.  The  per- 
sons concerned  could  not  say,  as  we  do,  that  a  thing  is 
worth  so  many  dollars,  for  that  would  imply  the  use  of 
money,  which  they  are  supposed  not  to  have.  In  order 
to  express  the  value  of  each  article,  they  would  need  a 
list  stating  how  much  of  every  other  article  a  given 
quantity  of  it  would  exchange  for.  In  fact,  the  company 
would  need  two  such  lists  for  each  article,  one  for  use 
in  buying  and  the  other  for  use  in  selling  it;  for  they 
could  not  afford  to  buy  and  sell  at  the  same  value. 

The  number  of  commodities  of  all  kinds  entering  into 
the  trade  of  a  civilized  community  being  so  great,  each 
list  would  be  extremely  long,  and  the  number  of  lists 
would  be  extremely  great.  There  would,  further,  be 
endless  labor  in  correcting  them  from  day  to  day,  owing 
to  the  continual  changes  that  occur  in  the  market  value 
of  things.  A  single  change  in  any  article  would  involve 
a  correction  of  every  list. 

Altogether,  then,  it  is  clear  that  exchange  of  products 
by  means  of  direct  barter  would  be  very  costly  and  labo- 
rious. The  institutions  for  making  exchanges  would 
necessarily  be  few  in  number,  so  that  most  producers 
would  have  to  travel  considerable  distances  in  order  to 
get  their  products  exchanged.  There  would  also  be  a 
danger  that  the  community  might  have  to  pay  very 
dearly  for  the  services  of  the  exchangers. 


CHAPTER     III. 

THE    USE    OF    MONEY    AS    A    MEDIUM    OF    EXCHANGE.  - 
NATURE    OF    BUYING    AND    SELLING. 

1.  Money  facilitates  Exchange.  —  It  is  only  by  consid- 
ering the  difficulties  attending  the  use  of  barter  that 
one  can  get  clear  views  as  to  the  true  nature  and  use 
of  money.  The  great  and  true  service  rendered  by 
money  is,  that  it  makes  the  exchange  of  commodities 
easy. 

This  it  accomplishes  in  two  ways.  First,  by  breaking 
up  the  exchange  into  two  parts  or  stages.  It  substi- 
tutes two  comparatively  easy  exchanges  for  one  ex- 
ceedingly difficult  one.  The  man  who  wishes  to 
exchange  a  carriage  for  a  coat,  a  watch,  and  a  barrel 
of  flour,  first  sells  the  carriage  for  money,  and  then 
with  the  money  buys  the  things  he  wants  wherever 
he  can  buy  them  most  favorably.  This  enables  the 
work  of  exchanging  things  to  go  on  without  the  help 
of  a  great  central  exchange. 

Secondly,  money  makes  exchange  easy  by  making  it 
possible  to  have  a  price  for  everything.  Instead  of 
cumbersome  lists,  showing  how  much  of  every  other 
article  a  thing  is  worth,  we  need  only  to  say  how 
much  money  it  is  worth.  Money  serves  as  a  standard 
of  value.  25 


26  Political    Economy. 

2.   Exchange  is  obscured   by  the   Use   of   Money.  —  In 

these  two  ways  the  use  of  money  renders  the  work  of 
exchanging  commodities  comparatively  easy  and  expedi- 
tious. But  it  greatly  increases  the  difficulty  of  study- 
ing political  economy.  The  use  of  money  give.s  rise  to 
most  of  the  wrong  ideas  against  which  political  economy 
has  to  contend.  Exchange  of  commodities  is  very  much 
disguised  by  it,  —  so  much  so,  in  fact,  that  many  men 
who  do  a  great  deal  of  exchanging  never  once  think  of 
it  as  exchanging  at  all.  They  think  of  selling  as  a 
thing  by  itself,  and  of  buying  as  a  thing  by  itself,— 
not  waiting  to  consider  that  these  are  in  reality  the 
separated  halves  of  an  exchange. 

Two  circumstances  tend  to  conceal  the  real  nature 
of  the  case.  In  the  first  place,  the  two  halves  of  the 
exchange  are  transacted  with  different  persons.  The 
man  to  whom,  in  our  example,  the  carriage  is  sold,  is 
not  the  man  from  whom  the  watch  or  the  coat  or  the 
barrel  of  flour  is  bought;  so  that  the  transaction  lacks 
the  appearance  of  an  exchange.  Secondly,  the  two  parts 
of  the  exchange  may  be  separated  by  a  considerable 
interval  of  time.  It  may  suit  the  convenience  of  the 
carriage-builder  not  to  buy  the  watch  or  the  coat  or 
the  barrel  of  flour  at  once.  With  the  money  in  his 
pocket,  he  can  safely  wait.  He  may  in  the  meantime 
make  and  sell  another  carriage,  and  the  money  derived 
from  the  new  sale  may  get  mixed  up  with  the  other 
money,  so  that  when  he  buys  a  thing  he  could  not  easily 
tell  for  which  of  the  carriages  he  receives  it  in  exchange. 


How  Money  Obscures  Exchanges.  27 

Thus  the  use  of  money,  while  making  exchange 
easy,  has  made  it  complicated.  When  men  sell  things, 
they  do  not  usually  think  of  the  particular  things  they 
are  to  buy  with  the  money  they  get.  They  may  not 
have  decided  yet.  Their  immediate  object  is  to  get 
money.  They  know  that  to  him  who  has  this,  the 
whole  market  is  open. 

Money  has  been  very  fitly  called  "general  purchasing 
power,"  because  it  can  be  so  readily  exchanged  for  any 
desired  commodity.  Until  the  actual  moment  of  pur- 
chase the  owner  of  money  is  free  to  choose  what  he 
will  have.  Yet  whe*i  he  does  buy,  it  is  clear  that  he  is 
simply  completing  the  exchange  that  was  begun  when 
he  obtained  the  money.  The  money  served  as  a  pledge 
that  he  should  receive  an  equivalent  for  the  thing  sold 
leaving  him  free  to  choose  the  time  and  the  form  in 
which  he  should  receive  it. 

Thus  the  use  of  money  enables  each  producer  to 
exchange  on  free  terms  with  the  general  body  of  other 
producers,  instead  of  being  limited  to  the  particular 
individual  who  buys  his  product  and  to  the  particular 
moment  at  which  he  buys  it.  These  facts  disguise 
the  exchange,  but  they  do  not  affect  its  real  character. 
In  the  end  each  producer  has  parted  with  certain 
things,  and  has  received  certain  other  things  in  return. 

3.  Buying  easier  than  Selling.  —  There  are  some 
other  circumstances  that  tend  to  obscure  this  funda- 
mental relation  between  buying  and  selling.  In  the 
first  place  the  use  of  money  affects  the  two  halves  of 


Political    Economy. 

exchange  very  unequally.  As  there  are  always  stocks 
of  goods  for  sale,  the  possession  of  money  makes  it 
comparatively  easy  to  get  what  we  want.  But  the 
difficulty  of  finding  the  persons  who  want  our  product 
remains  precisely  as  great  as  it  would  be  under  a 
system  of  barter.  Thus  the  chief  remaining  difficulty 
in  making  the  exchanges  is  thrown  on  the  side  of 
selling. 

There  is  usually  no  small  difficulty  in  getting  things 
sold  at  satisfactory  prices.  The  attention  of  business 
men,  producers  as  well  as  traders,  is  thus  ordinarily 
fixed  on  their  sales.  Every  other  part  of  their  busi- 
ness they  can  control,  but  for  their  sales  they  must 
await  the  pleasure  of  other  men.  This  is,  therefore, 
the  part  that  causes  anxiety.  A  natural  result  of 
this  is  a  tendency  to  forget  the  other  part  of  the 
exchanges  they  are  carrying  on,  and  to  view  all  sorts 
of  industrial  activity  merely  as  so  many  different 
ways  of  getting  money.  From  this  state  of  mind 
manifold  errors  spring. 

The  student  of  political  economy  has  made  his  first 
real  step  in  the  science,  when  he  has  perceived  clearly 
that  buying  and  selling  are  merely  the  easiest  way  of 
exchanging  products,  and  that,  though  buying  is  so 
much  easier  than  selling,  it  is  not  a  whit  less  im- 
portant. In  fact,  what  is  selling  for  one  man  is 
buying  for  another. 

4.  Function  of  Traders.  —  It  may  occur  to  the  reader 
that  there  are  some  facts  of  daily  life  which  seem  to  con- 


The  Trading   Class.  29 


flict  with  this  view  of  buying  and  selling.  To  begin 
with,  there  is  the  fact  that  merchants  and  traders 
constantly  buy  and  sell  the  same  thing.  When  the 
cloth  merchant  has  sold  his  cloth  he  does  not  buy 
a  stock  of  other  commodities :  he  buys  more  cloth. 
In  this  sort  of  buying  and  selling  there  would  seem 
to  be  no  exchange  of  commodities.  But  we  must 
note  the  fact  that  merchants  and  traders  buy  of  one 
set  of  men  and  sell  to  quite  a  different  set.  As  a 
class,  they  buy  of  those  who  produce  and  sell  to 
those  who  consume.  The  truth,  then,  is  that  they  are 
the  men  who  manage  the  exchange  of  products  for  us. 

Money  allows  division  of  labor  to  be  used  in  ex- 
change as  well  as  in  production.  Instead  of  one  great 
central  place  of  general  exchange,  money  enables  us 
to  have  many  small  establishments,  in  each  of  which 
some  part  of  the  work  is  done.  Each  dealer  devotes 
himself  to  trading  in  some  one  commodity,  or  in  a 
limited  number  of  commodities.  His  buying  and 
selling  are  part  of  the  process  by  which  commodities 
find  their  way  from  the  farms,  mines,  factories,  and 
mills  where  they  are  produced,  to  the  hands  of  those 
who  are  to  consume  them. 

Things  are  usually  bought  and  sold  at  least  three 
times  in  passing  from  the  producer  to  the  consumer. 
The  manufacturer  sells  to  the  wholesale  dealer,  the 
wholesale  dealer  to  the  shopkeeper,  and  the  shop- 
keeper to  the  consumer.  In  some  trades  there  are 
several  other  intermediate  changes  of  ownership. 


30  Political    Economy, 

These  transfers  from  dealer  to  dealer  are  for  con- 
venience and  economy.  They  simplify  the  operations 
of  each  dealer,  and  are  commercially  of  great  impor- 
tance. But  fox  political  economy  they  have  little 
significance  beyond  their  effect  in  lessening  the  labor 
of  carrying  on  exchange.  In  all  respects  except  that 
of  economy  and  convenience  the  man  who  buys  of 
the  producer  might  be  the  same  who  sells  to  the 
consumer.  These  are  the  essential  transactions  in 
economic  exchange ;  all  the  intermediate  transfers  are 
merely  helps  towards  making  these  easy. 

5.  Buying   and   Selling  do   not  create  Wealth,  —  The 
gains  made  by  buying  and  selling  are  often  very  large,  — 
so  large  that  many  think  of  buying  and  selling  as  the 
true   source   of   wealth.      But   one   who   reflects   at   all 
readily  sees  that  mere   buying  and  selling  can  produce 
nothing.     Individuals  may  grow  rich  by  fortunate  opera- 
tions of  that    kind ;    but  the    whole  community  .cannot 
do   so.     The   general  wealth  can   be  increased  only  by 
producing  more  or  by  saving  more. 

If  all  the  commodities  in  the  world  were  bought  and 
sold  fifty  times  in  a  day,  with  a  rise  of  price  at  eacli 
new  sale,  the  world  would  be  no  richer  at  the  end  of 
the  day  than  it  was  at  the  beginning.  Some  indi- 
viduals might  no  doubt  be  richer;  but  others  would 
be  poorer  by  the  same  amount. 

6.  Speculative  Buying  and  Selling. —  Every  change  in 
the  price  of  an  article   usually  brings  gain   or  loss    to 
those  who  happen  to  have  stocks  of  it  on  hand.     Such 


Speculators.  31 


changes  are  an  unavoidable  evil.  They  disturb  the 
course  of  trade  and  production.  The  opportunities  they 
present  for  making  large  and  sudden  gains  give  rise, 
in  every  community,  to  a  class  of  men  called  specu- 
lators. 

Speculators  perform  no  necessary  part  of  the  work 
of  exchange.  They  carry  things  no  step  forward  from 
the.  producer  to  the  consumer.  They  merely  aim  to 
profit  by  the  fluctuations  of  the  market.  By  buying 
things  that  are  about  to  rise  in  price,  and  selling 
again  after  the  rise,  they  are  able  to  gain  the  differ- 
ence. If  prices  were  steady,  they  would  have  no  basis 
for  their  operations. 

So  far  as  speculators  merely  anticipate  the  natural 
course  of  the  market,  their  operations  are  entirely  legit- 
imate, and  even  at  times  beneficial  to  the  community. 
By  buying  in  seasons  of  plenty  and  carrying  over  a 
stock  that  might  otherwise  be  partly  wasted,  they  some- 
times help  out  the  deficiency  in  seasons  of  dearth.  But 
when,  for  purposes  of  gain,  they  impose  on  the  igno- 
rance or  timidity  of  their  neighbors,  when  they  resort 
to  knavery  and  deception,  —  when,  by  combinations 
and  "  corners,"  they  create  artificial  fluctuations  of  the 
market,  —  they  become  enemies  of  honest  industry  and 
a  burden  to  the  community. 

7.  Some  appear  only  as  Buyers.  —  There  is  another 
circumstance  which  seems  to  conflict  with  the  view  that 
buying  and  selling  are  at  bottom  exchange  of  commodi- 
ties. Many  persons  appear^jrf^S^^Sefe^They  have 


32  Political    Economy. 

nothing  to  sell,  for  they  produce  nothing.  The  large 
class  who  live  in  idleness  are  in  this  position.  Also  the 
more  numerous  class  who,  though  doing  useful  service 
in  other  ways,  take  no  part  in  the  production  of  com- 
modities. Even  the  hired  laborers,  who  do  the  chief 
work  of  production,  appear  in  the  market  as  buyers 
only.  How,  then,  shall  we  maintain  the  doctrine  that 
buying  and-  selling  are  mainly  exchanging  of  things  ? 

As  it  is  of  the  highest  importance  that  the  beginner 
should  be  quite  clear  on  this  point,  let  us  consider  these 
cases.  First  the  case  of  the  idlers.  It  is  obvious  that 
these,  in  order  to  be  able  to  buy  anything,  must  have 
an  income  from  some  source.  Some  of  them  own 
estates  of  land  and  receive  rents  from  their  tenants ; 
others  own  buildings  or  building-lots  in  the  cities ; 
still  others  hold  bonds,  mortgages,  railway  stocks,  etc. 
Their  income  from  these  sources  is  now  commonly 
paid  in  money.  But  this  is  merely  for  the  convenience 
of  all  concerned.  If  there  were  no  money  in  the 
world,  there  would  still  be  farms  and  city  lots  and  the 
various  other  forms  of  property  named.  The  rents, 
however,  would  have  to  be  paid  in  commodities :  so 
many  bushels  of  wheat,  so  many  tons  of  coal,  so  many 
yards  of  cloth. 

In  some  countries  rent  of  land  is  actually  paid  in 
products  of  the  land  itself.  If  all  rents,  dividends,  and 
interest  were  paid  in  commodities,  the  objection  we 
are  considering  would  not  be  thought  of.  The  persons 
receiving  income  from  such  sources  would  receive  it 


Buying  is  Exchanging.  33 

either  in  the  precise  commodities  they  happened  to 
need  for  their  own  use,  or  in  other  things.  If 
they  received  the  things  needed  for  their  own  use, 
they  would  not  appear  in  the  market  .at  all  :  they 
would  be  neither  buyers  nor  sellers.  If,  on  the 
other  hand,  they  received  things  unsuitable  for  their 
own  use,  they  would  appear  in  the  market  both  as 
sellers  and  as  buyers.  It  would  then  be  clear  that 
their  purchases  are  in  fact  part  and  parcel  of  the 
general  exchange  of  commodities. 

At  present  the  troublesome  half  of  their  exchange 
is  done  for  these  persons  by  those  who  pay  them 
rents,  interest,  or  dividends.  Others  are  compelled 
to  sell  more  than  they  buy  by  the  full  amount  of 
the  money  paid  to  the  receivers  of  rent,  interest, 
and  dividends.  If  those  others  were  allowed  to 
spend  the  money  for  themselves,  their  buying  would 
simply  be  equal  to  their  selling,  and  there  would 
be  no  difficulty  in  perceiving  the  reality  of  the 
exchange.  That  they  hand  over  a  part  of  their 
buying  power  to  their  landlords  and  creditors  does 
not  change  the  essential  features  of  the  case.  Their 
landlords  and  creditors  simply  complete  exchanges 
whereof  the  difficult  half  has  been  done  already. 

The  same  remarks  apply  to  all  payments  of  money 
in  the  form  of  fees,  salaries,  and  wages.  Men 
nominally  work  for  money,  but  in  reality  they 
work  for  commodities.  By  getting  paid  in  money, 
they  really  get  the  commodities,  without  any  danger 


34  Political    Economy. 

of  disputes  about  quality  or  kind,  and  without  the 
trouble  and  risks  attending  the  difficult  half  of  ex- 
change. 

If  each  laborer  were  paid  in  the  product  of  his 
own  labor,  he  would  run  great  risks  of  loss  and 
suffering  in  the  effort  to  sell  it.  The  arrangement 
whereby  laborers  receive  money  for  their  labor  frees 
them  from  all  that  trouble  and  risk.  The  employer 
does  the  selling  for  them.  His  purchases  of  com- 
modities fall  short  of  his  sales  by  the  whole  amount 
of  the  laborers'  purchases.  Their  buying  simply 
completes  the  exchange  that  his  selling  begins. 

8,  Money  and  Prices.  —  Since  the  final  object  of 
all  our  industrial  exertions  is  to  obtain  enjoyable 
commodities  or  services,  it  follows  that  the  amount 
of  money  we  receive  does  not,  of  itself,  determine 
our  reward.  In  order  to  know  how  much  we  are 
receiving  for  our  labors,  we  must  also  know  the 
prices  of  the  things  we  wish  to  buy  with  the 
money.  If  the  prices  be  fixed,  any  increase  of  our 
money  income  means  a  corresponding  increase  of 
our  real  rewards.  Similarly  if  our  money  incomes 
be  fixed,  a  fall  in  the  prices  of  the  things  we  buy 
means  a  corresponding  increase  of  our  real  rewards. 
But  an  increase  of  onr  money  income,  accompanied 
by  an  equal  rise  in  the  prices  of  the  things  we 
buy,  would  leave  us  no  better  off  than  before. 

These  are  important  principles  and  need  to  be 
steadily  borne  in  mind.  Many  speak  and  act  as  if 


Our  Money  not  our  Pay.  35 

mere  increase  of  money  were,  in  and  of  itself,  a 
general  blessing.  But  to  one  who  reflects  at  all, 
it  must  be  clear  that  what  we  need  in  order  to 
have  an  increase  of  the  general  wealth  is  not  more 
money,  but  more  commodities.  If  every  person's 
money  income  were  doubled,  without  any  increased 
production  of  commodities,  nobody  would  be  better 
off  than  before. 

QUESTIONS    AND    EXERCISES. 

1.  Describe  the  advantages  arising  from  division  of  labor. 

2.  Show  that  the  trouble   of  exchanging  products  is  a  disad- 
vantage attending  division  of  labor. 

3.  Could  exchange  be  carried  on  by  barter  ? 

4.  Show  how  the  use  of  money  facilitates  exchange. 

5.  How   does   the    use    of    money  disguise  the    exchange    of 
products  ? 

6.  Why  is  it  usually  so  much  harder  to  sell  than  to  buy? 

7.  Trace  carefully  the  exchanges  of  products  in  the  following 
cases : 

(a)  A  farmer  receives  $25  for  wheat,  uses  $20  of  the  amount  to 
pay  his  debt  to  the  coal-dealer,  and  with  the  balance  buys  a  dozen 
of  spoons. 

(b)  The  coal -dealer  pays  the  $20  to  his  bookkeeper,  who  buys 
with  it  a  suit  of  clothes  from  the  tailor. 

(c)  The  tailor  uses  the  money  to  pay  his  house  rent,  and  the 
owner  of  the  house  buys  a  watch  with  it. 

8.  A  teacher  receives  her  salary  from  the  town  treasury  and 
spends  half  of  it  in  buying  books  and  deposits  the  balance  in  a 
savings  bank.     [Consider  the  tax-payers  as  well  as  the   teacher 
and  the  book-sellers.J 


CHAPTEK  IV. 

OF  WEALTH  AND  THE  DISTINCTION  BETWEEN  NATURAL 
WEALTH  AND  WEALTH  PRODUCED  BY  LABOR. 

1.  Wealth  consists  of  Material  Objects.  —  It  has  been 
stated  that  the  word  "  wealth  "  is  simply  a  short 
name  for  the  numberless  things  we  all  like  to  have 
and  to  own.  It  is  now  necessary  to  define  wealth 
somewhat  more  fully,  in  order  that  there  may  be 
no  misunderstanding  as  to  the  nature  and  extent  of 
our  subject. 

The  first  point  to  be  noted  is  that  the  wealth 
of  which  political  economy  treats  is  material  wealth. 
The  things  comprised  in  it  are  material  objects.  Our 
invisible  possessions,  our  powers  of  body  and  mind, 
even  those  of  them  that  come  into  play  in  getting 
material  wealth,  are  not  themselves  included  in  the 
definition  of  our  wealth,  since  they  are  rather  part  of 
ourselves  than  of  our  worldly  goods.  The  wealth  we 
speak  of  in  political  economy  is  such  as  one  may 
part  with  at  will.  Therefore  we  exclude  our  personal 
gifts  and  attainments,  such  as  knowledge,  intelligence, 
skill,  good  health,  physical  strength,  social  position, 
a  good  name,  the  love  of  friends,  and  the  like. 
This  implies  no  contempt  for  these  unseen  possessions, 

36 


What  our   Wealth  Includes.  37 

which  are,  in  fact,  far  more  important  and  precious 
than  mere  material  wealth.  We  only  mean  that 
political  economy  does  not  undertake  to  deal  with 
them.  It  wisely  confines  itself  to  the  humbler  task  of 
considering  those  material  things  that  men  need  for 
the  support  of  life,  or  desire  as  aids  to  comfortable 
living. 

2.  Useless  Things  are  not  Wealth.  —  Wealth,  then, 
consists  of  material  objects  ;  but  not  all  material  objects 
are  wealth.  Things  that  have  no  known  use  for  us, 
things  that  nobody  wants,  are  not  wealth.  This 
principle  excludes  from  wealth  a  large  part  of  the 
material  objects  in  the  world.  It  applies  not  only  to 
useless  things  found  in  nature,  such  as  desert  lands, 
useless  rocks,  weeds,  noxious  animals,  etc.,  but  also  to 
products  of  labor  that  are  worn  out  or  have  proved  to 
be  useless. 

Of  course  a  thing  may  have  useful  properties  not 
yet  discovered.  •  To  men  who  are  ignorant  of  the 
good  in  it,  it  is  not  wealth.  (Thus  wealth  depends  on 
knowledge.  The  metallic  ores  were  not  wealth  till 
men  learned  to  smelt  and  forge  them.  Linen  rags 
were  not  wealth  till  men  learned  the  art  of  making 
them  into  paper.  We  cannot  tell  how  many  sub- 
stances now  regarded  as  useless  rubbish  may  become, 
through  new  discoveries,  valuable  portions  of  the 
world's  wealth.1 

1  The    words    useful    and    useless,  as    here    employed,  have  no 
necessary  reference  to   any  real   or  intrinsic   usefulness.     A   thing 


38  Political    Economy. 

It  may  be  well  to  add  that  wealth  implies  posses- 
sion, or  the  ability  on  the  part  of  somebody  to  have 
the  use  of  it.  Therefore  things  that  are  beyond  our 
reach  are  not  wealth.  Mineral  beds  that  lie  too  deep 
to  be  dug  up,  treasures  at  the  bottom  of  the  sea,  game 
that  is  too  wary  to  be  caught,  are  examples.  Here 
again  new  discoveries  and  inventions  may  bring  within 
our  reach  things  that  have  hitherto  been  of  no  use  to 
us  because  unknown,  or  regarded  as  inaccessible. 

Our  wealth,  then,  consists  of  all  the  useful  and 
agreeable  material  objects  we  own,  or  have  the  right 
to  use  and  enjoy  without  asking  the  consent  of  any 
other  person. 

3.  Rights  over  Human  Beings  are  not  Wealth.  —  We 
have  seen  that  a  man's  powers  of  body  and  mind  are 
not  included  in  his  wealth.  Much  less  can  they,  in 
any  case,  be  regarded  as  the  wealth  of  another.  Men, 
the  owners  of  wealth,  can  never  themselves  be 
regarded  as  mere  wealth,  even  when  reduced  to  a 
state  of  slavery.  To  the  slave-owner,  indeed,  the 
possession  of  slaves  may  be  a  source  of  income ;  it 
may  suit  him  in  his  pride  of  mastery  over  his  fellow- 
men  to  regard  them  as  his  property.  But  to  adopt 
that  view  would  be  to  forget  the  poor  slaves,  who 
are  members  of  the  community,  with  as  good  a 
claim  to  be  considered  as  the  master  has.  All  that 

is  useful,  in  the  sense  here  intended,  if  it  is  an  object  of  desire 
to  any  portion  of  the  human  race.  It  may  be  in  itself  strictly 
worthless,  or  even  injurious  to  those  who  use  it :  the  fact  that 
men  desire  to  have  it  makes  it  a  part  of  wealth. 


Rights  over  Men  not    Wealth.  39 

the  master  gains  by  the  existence  of  slavery  they 
lose.  If  he  is  richer  by  reason  of  his  power  to  exact 
their  service,  they  are  poorer  to  the  same  extent  by 
the  loss  of  their  freedom  and  the  products  of  their 
labor.  Therefore,  in  any  country  where  slavery  exists, 
the  wealth  of  the  community  as  a  whole  would  not  be 
lessened  by  freeing  the  slaves ;  nor,  in  free  countries, 
would  it  be  increased  by  making  one  part  of  the 
population  slaves  of  the  other  part. 

The  same  principle  applies  to  all  other  claims  and 
rights  of  one  man  over  the  person  or  the  property 
of  other  men.  Debts  of  all  kinds,  as  well  as  all 
mere  proofs  of  debt,  such  as  notes,  bonds,  mortgages, 
etc.,  must  be  excluded  from  our  idea  of  wealth. 
They  merely  show  to  whom  the  wealth  belongs,  or 
will  belong  when  the  debts  are  paid.  If  every  debt 
were  forgiven,  and  every  bond,  note,  and  mortgage 
were  cancelled,  we  should  still  have  precisely  as 
much  wealth  in  the  country  as  we  had  before.  We 
create  no  riches  by  getting  into  debt  or  by  writing 
mortgages  on  our  property. 

4.  Natural  Wealth  and  Wealth  produced  by  Labor.— 
The  wealth  of  the  people  of  the  United  States  is 
of  two  general  kinds.  Partly  it  consists  of  what 
remains  of  the  natural  resources  that  originally 
fitted  our  country  to  be  the  home  of  a  civilized 
nation.  This  part,  which  we  may  call  our  Natural 
Wealth,  our  forefathers  acquired  for  themselves  and  us 
simply  by  coming  over  the  sea  and  taking  possession; 


40  Political    Economy. 


it  cost  no  labor  beyond  the  trouble  of  taking  and 
holding  it.  The  other  part  of  our  wealth  consists  of 
products  of  human  industry,  —  things  for  which,  or 
upon  which,  labor  in  some  form  has  been  expended. 
This  part  we  may  call  Wealth  produced  by  Labor. 

Natural  wealth  includes  the  land,  with  its  sponta- 
neous growth  of  forest-trees,  etc.,  its  bearing  capacity 
under  tillage,  and  its  varied  uses  as  our  home ;  also 
all  such  things  as  deposits  of  coal,  iron,  and  other 
useful  metals  and  minerals;  water  and  water-power; 
electricity;  the  expansive  force  of  steam,  and  all  other 
physical  forces ;  harbors  and  navigable  rivers  ;  fisheries, 
wild  game  and  the  like  ;  a  pleasant  and  healthful  cli- 
mate ;  a  favorable  position  for  commerce ;  —  in  a  word 
every  resource  and  advantage  of  a  material  kind  be- 
stowed on  men  by  the  beneficence  of  the  Creator. 
We  must  also  include  in  natural  wealth  some  things 
that  ordinarily  come  to  us  so  freely,  without  care  or 
effort  on  our  part,  that  we  rarely  give  them  even  a 
thought.  It  may  seem  strange,  at  first,  to  give  the 
name  of  wealth  to  air,  water,  and  sunlight;  but  they 
are  surely  among  the  most  important  things  in  the 
world,  as  anybody  quickly  discovers  who  is  cut  off 
from  adequate  supplies  of  them.  '  That  they  come  to 
us  so  easily  would  be  a  poor  reason  for  excluding 
them  from  the  list  of  things  constituting  our  natural 
wealth. 

The  modes  in  which  natural  wealth  is  useful  are 
highly  varied;  it  would  be  difficult  to  mention  all 


Two  General  Divisions  of  Wealth.  41 

of  them.  Some  things  are  directly  useful  to  us  just 
as  we  find  them  and  where  we  find  them ;  e.  g.  air, 
sunlight,  and  (merely  as  a  lodging-place)  land.  Other 
things  are  made  useful  by  merely  bringing  them  to 
the  place  where  we  need  them;  for  example,  coal 
and  other  fuel,  mineral  oil,  game,  fish,  etc.  Other 
things  serve  mainly  as  materials  for  the  production 
of  useful  commodities ;  e.  g.  metallic  ores,  wool, 
cotton,  silk ;  skins  of  animals,  woods  other  than  fuel, 
marble,  etc.  Still  other  parts  of  natural  wealth  are 
useful  chiefly  as  necessary  agents  in  the  production 
of  commodities  or  materials,  or  as  aids  in  producing 
and  transporting  commodities  and  materials  from  one 
place  to  another;  e.  g.  the  soil,  the  motive  power  of 
wind,  water,  and  steam,  and  the  various  physical 
forces  that  come  into  play  in  the  growth  of  plants 
and  animals. 

Wealth  produced  by  labor  includes  all  useful 
things  that  have  been  prepared  for  use  by  exertion 
of  any  kind  on  the  part  of  men ;  for  example, 
houses,  furniture,  pictures,  food,  clothing,  horses,  and 
other  domestic  animals,  machinery,  ships,  railways, 
money,  etc. 

Land  in  its  wild  state,  fishes  in  the  sea,  coal  in 
the  seam,  trees  in  the  forest,  belong  to  natural 
wealth.  Cultivated  farms,  fish  that  has  been  caught, 
coal  that  has  been  mined,  lumber  that  has  been  cut, 
belong  to  wealth  produced  by  labor. 

5.     The    Nature     of    Production.  —  Obviously    natural 


42  Political    Economy. 

wealth  is  the  basis  or  source  of  all  wealth  produced 
by  labor.  Men  create  nothing.  They  can  only  make 
use  of  the  materials,  forces,  and  opportunities  they 
find  in  the  world  about  them.  Strictly,  what  we  call 
Production  consists,  so  far  as  men  are  concerned,  in 
moving  things  or  parts  of  things  from  one  place  or 
position  to  another.  Consider  carefully,  for  example, 
what  men  do  in  building  a  house,  or  in  making 
clothes,  or  in  procuring  food,  and  you  will  perceive 
that  it  is  confined  to  moving  things,  or  placing 
things  in  particular  ways.  The  so-called  forces  of 
nature  do  the  rest.  Men  plough  the  ground,  sow  the 
seed,  and  harvest  the  crop,  but  without  the  germi- 
nating principle  in  the  seed  itself,  and  the  nourishing 
influences  of  sun,  rain,  and  soil,  the  united  labors 
of  the  whole  human  race  could  not  avail  to  pro- 
duce a  grain  of  wheat. 

In  some  cases  the  work  of  production  consists 
more  obviously  of  moving  things  than  in  other  cases. 
In  the  production  of  beef,  for  example,  it  is  only  by 
an  effort  of  thought  that  we  perceive  the  exact  nature 
of  men's  contribution  to  the  product.  But  in  the  case 
of  producing  coal,  lumber,  fish,  ice,  and  the  like,  we 
perceive  it  very  readily.  The  reason  is  that  in  the 
latter  case  nature's  work  is,  so  to  say,  completed 
before  man's  part  begins ;  whereas  in  the  other  case 
man's  work  and  nature's  work  go  on  simultaneously, 
and  men  easily  take  credit  to  themselves  for  more 
than  they  actually  accomplish. 


CHAPTER  V. 

WHY   NATURAL   WEALTH,  ORIGINALLY  A  GIFT   TO  MEN. 
CANNOT    ALWAYS    BE    OBTAINED    FREE   OF    COST. 

1.  The  Supply  of  Natural  Wealth.  —  Different  kinds 
of  natural  wealth  differ  very  much  in  point  of 
copiousness  of  supply.  Some  forms  of  it  are  found 
in  practically  unlimited  quantity  in  every  part  of 
the  habitable  globe  :  the  air  is  an  example  of  this. 
Other  kinds  are  found  in  abundance  in  particular 
neighborhoods,  while  in  other  places  little  or  none 
is  found  :  coal,  petroleum,  and  most  of  the  metals  are 
examples  ;  also  the  distinctive  natural  products  of  par- 
ticular zones  of  the  world.  Still  other  kinds  of  natu- 
ral wealth  are  found  in  but  few  places  and  in  but 
small  quantities :  of  these  gold  and  silver,  diamonds 
and  other  precious  stones  are  examples. 

Again  it  usually  happens  that  not  all  portions  of 
the  supply  in  any  given  region  are  equally  desirable. 
In  some  cases  the  differences  relate  to  quality,  in 
other  cases  to  ease  of  access  or  convenience  in  use ; 
in  still  other  cases  some  portions  of  the  supply 
combine  several  kinds  of  superiority  over  other  por- 
tions. There  is  usually,  therefore,  a  descending  scale  of 
excellence  from  the  best  to  the  poorest  in  the  case  of 

4:} 


44  Political    Economy. 

each  species  of  material  wealth  in  any  given  region. 
Further,  the  best  and  really  desirable  portions  are  in 
most  cases  very  limited  in  supply  as  compared  with 
the  less  desirable  portions. 

These  facts  are  most  clearly  seen  in  the  case  of 
Land,  one  of  the  most  important  parts  of  natural 
wealth.  The  whole  area  of  land  in  the  world  is  very 
great,  but  different  portions  of  it  differ  very  much  in 
point  of  fertility,  convenience  of  situation,  nearness  to 
the  great  centres  of  population,  etc.  Further,  the 
amount  of  really  excellent  land,  excellent  in  all 
respects,  is  very  limited  in  comparison  with  the 
amount  of  indifferent  and  distinctly  poor  land.  Be- 
tween the  two  extremes,  the  best  and  the  utterly 
useless,  there  is  an  infinite  variety  in  lands,  one 
piece  differing  from  another  by  a  very  slight  balance 
of  advantages. 

2.  The  Demand  for  Natural  Wealth.  —  The  demand 
for  natural  wealth  in  any  region  depends  partly  on 
the  number  and  partly  on  the  character  of  its 
inhabitants.  The  demands  of  a  civilized  people  are 
very  different  from  those  of  a  savage  one.  In  one 
sense  at  least  the  savage  has  a  larger  demand  for 
natural  wealth  than  the  civilized  man.  He  must 
have  a  wide  range  of  territory  for  his  hunting  and 
other  crude  pursuits,  otherwise  he  cannot  find  a 
subsistence.  His  demand  is,  so  to  say,  a  wasteful 
one:  he  must  have  much  more  natural  wealth  than 
he  uses.  He  remains  poor  and  squalid  in  the  midst 
of  overflowing  natural  wealth. 


Natural   Wealth.  45 


The  civilized  man,  on  the  other  hand,  has  a  stronger 
demand  for  material  wealth  than  the  savage.  There 
is  no  known  limit  to  his  demand  for  natural  wealth, 
except  his  physical  ability  to  make  use  of  it.  His 
demand  is,  however,  much  more  intelligent  than  that 
of  the  savage.  He  seeks  out  all  the  various  resources 
of  his  region,  and  endeavors  by  labor  to  turn  all  the 
best  of  them  to  account.  A  civilized  community  may, 
therefore,  live  and  nourish  in  a  region  where  a  savage 
community  one-tenth  as  numerous  would  perish  of 
want. 

Given  the  character  of  the  inhabitants  of  a  country,  we 
may  safely  assume  that  the  demand  for  natural  wealth 
will  increase  with  the  increase  of  population.  The 
more  persons  there  are  to  be  supplied,  the  greater  the 
amount  needed  to  satisfy  them.  This  does  not  mean 
that  the  demand  for  each  kind  of  natural  wealth  must 
increase  in  the  same  proportion:  trade  between  different 
regions  and  countries  modifies  the  particular  direction 
of  the  demand  in  each  case.  England,  for  example, 
draws  her  supply  of  wheat  largely  from  the  United 
States.  This  increases  in  our  country  the  demand  for 
wheat-growing  lands,  and  diminishes  the  demand  for  the 
sources  of  materials  needed  for  the  production  of  the 
things  we  get  in  exchange  for  the  wheat.  In  England 
there  is  a  lessened  demand  for  wheat-growing  land,  and 
an  increased  demand  for  the  natural  wealth  needed  for 
the  production  of  the  articles  she  gives  us  in  exchange. 
Still,  it  is  clear  that  an  increase  of  population  involves, 


46  Political    Economy. 

in  every  country,  an  increased  demand  for  some  form, 
and  usually  for  all  forms,  of  natural  wealth. 

3.  Natural    Wealth    is    gratuitous    while    the    Supply 
exceeds   the   Demand.  —  Natural   wealth   is   originally   a 
gift   to   the   human   race.     The   first   owner,  whether  a 
government   or   an   individual,  gets   it   in   all   cases  for 
the    mere     trouble     of    taking    it.     So    long,    in    any 
region,   as    there    is    enough    of    any    particular    kind 
of   natural  wealth  to  satisfy  the  whole  desire  of  every- 
body for  the  possession  of  it,  that  particular   kind    can 
be  obtained  free  of  cost  by  everybody.     No  man  would 
pay  a  price  for  a  given  portion  of  it,  if  other   portions 
equally  desirable  were  still  to  be  had    out    of   nature's 
free    supply.     Therefore    natural    wealth    that  is    found 
everywhere     in     unlimited     quantity    and    of    uniform 
quality,  —  air,  for   example,  —  can  never  cost   any  man 
anything.     There    are,   no    doubt,  special    circumstances 
in  which  men  find  themselves  cut  off  from  the  natural 
supply  of  air,  in  which,  therefore,  laborious  contrivances 
have  to  be  used  for  conveying  fresh  air  to  them.     But 
fresh    air    in  a    crowded    hall,    or    in  a  mine,    or    in  a 
diving-bell,  is  brought  there  by  the  use  of  labor:   is,  in 
fact,  a  product  of  labor  quite  as  truly  as    coal    in   our 
bins    or   ice  in  our  refrigerators  is  a  product  of   labor. 
The  contrivances  for  conveying  it  cost  something  ;   but 
the  air  itself  required  for  the  purpose  costs  nothing. 

4.  Natural  Wealth  acquires  a  Price  when  Demand  ex- 
ceeds Supply.  —  Natural  wealth  that  is  limited  in  supply 
can  also  be  obtained   free  of  cost  wherever  the  supply, 


Natural    Wealth.  47 


though  limited,  exceeds  the  demand.  But  so  soon  as, 
owing  to  increase  of  population,  the  demand  for  any 
given  kind  of  natural  wealth  becomes  greater  than 
the  supply,  that  particular  kind  passes  into  the  list 
of  things  for  which  a  price  must  be  paid.  Those  who 
wish  to  get  it  must  induce  some  holder  of  it  to  part 
with  his  holding,  by  the  offer  of  something  else  in 
exchange. 

It  may  seem,  in  such  a  case,  that  the  cause  of  the 
price  is  the  fact  that  certain  persons  hold  the  whole 
supply  and  refuse  to  part  with  it  without  payment. 
But  the  true  cause  is  the  greatness  of  the  demand. 
If  the  whole  supply  were  again  thrown  open  to 
everybody  free  of  cost,  or  were  shared  equally  among 
all  seekers,  the  article  would  still  command  a  price, 
because  (on  the  supposition  that  the  demand  exceeds 
the  supply)  there  would  still  be  some  persons  de- 
sirous of  getting  more  than  the  equal  sharing  would 
give  them ;  and  they  would  be  ready  to  pay  some- 
thing to  other  holders  for  their  share. 

Since  most  kinds  of  natural  wealth  are  found  in 
varying  degrees  of  excellence,  only  the  better  grades 
or  specimens  of  each  have  a  price  at  first.  So  long 
as  the  next  inferior  grade  exceeds  the  demand  for  it, 
it  will  remain  gratuitous ;  and  the  price  of  the  better 
grade  will  be  limited  to  the  value  of  the  difference 
between  them. 

Since  the  population  of  most  parts  of  the  United 
States  is  increasing,  we  find,  as  we  should  expect 


48  .  Political    Economy. 

to  find,  that  many  things  which  could  formerly  be 
obtained  free  of  cost,  or  at  a  merely  nominal  price, 
are  now  no  longer  so  obtainable.  Also  since  the 
ratio  of  population  to  natural  wealth  differs  greatly 
in  different  parts  of  the  country,  we  find  that  some 
forms  of  natural  wealth  which  cost  little  or  nothing 
in  one  part,  have  a  considerable  price  in  other  parts. 

Of  course  in  the  case  of  transportable  things,  this 
difference  of  price  could  not  ordinarily  exceed  the 
cost  of  transportation.  But  the  cost  of  transportation 
is  itself  considerable,  especially  in  the  case  of  bulky 
and  heavy  articles  such  as  make  up  so  large  a  part 
of  natural  wealth  (e.  g.  coal,  wood  of  all  kinds,  build- 
ing-stone, metallic  ores,  etc.).  Again  some  kinds  of 
natural  wealth  are  not  transportable.  Land,  for  ex- 
ample, cannot  be  carried  from  regions  where  it  is 
cheap  to  places  where  it  is  dear.  It  therefore  happens 
that  land,  especially  land  for  building  purposes,  may 
have  a  very  high  price  in  one  place  and  a  very  low 
one  in  another.  A  single  square  yard  of  land  in  the 
central  parts  of  New  York,  or  Chicago,  costs  more 
than  a  square  mile  in  some  parts  of  the  world. 

5.  Some  Exceptional  Cases.  —  There  are  a  few  forms 
of  natural  wealth  that  never  acquire  a  value  in  ex- 
change, however  far  the  supply  of  them  may  fall 
short  of  satisfying  the  demand.  In  certain  cases  this 
is  because  the  nature  of  the  thing  is  such  that  many 
persons  can  use  it  in  common  without  interfering 
with  each  other,  and  the  laws  of  civilized  countries 


Natural   Wealth.  49 


give  the  right  of  use  to  everybody  free  of  charge: 
harbors*  and  navigable  rivers  are  examples.  In  the 
remaining  cases  the  failure  to  acquire  exchange  value 
is  due  to  the  fact  that  the  nature  of  the  things 
themselves  renders  it  impossible  for  them  to  be 
bought  and  sold.  Bain,  for  example,  would  bring 
a  high  price  in  some  countries  at  almost  any  time, 
and  in  every  country  at  particular  times.  But  rain 
is  a  form  of  natural  wealth  that  cannot  be  transferred 
or  diverted  from  one  man's  fields  to  those  of  another, 
or  from  one  region  to  another.  The  same  is  true  of 
all  other  elements  that  go  to  form  the  climate  of  any 
region.  Those  who  would  'have  the  benefit  of  them 
must  go  where  they  are  found,  and  found  only  as 
gratuities  of  nature. 

Though  harbors,  rivers,  climate,  scenery,  and  the  like 
have  no  exchange  value  of  their  own,  it  is  obvious  that 
they  may  affect  very  much  the  value  of  other  kinds 
of  natural  wealth,  —  especially  that  of  land.  It  is 
well  known  that  land  lying  near  to  harbors  and  navi- 
gable rivers  has  a  higher  value  than  land,  equally 
good  as  land,  which  is  remote  from  such  facilities.  In 
the  same  way  a  good  climate,  including  regularity  and 
sufficiency  of  rainfall,  tends  to  attract  men  to  the 
regions  enjoying  those  advantages.  The  resulting  in- 
crease of  demand  for  the  natural  wealth  of  those 
regions  must,  of  course,  tend  to  raise  the  value  of  such 
parts  of  it  as  can  have  exchange  value. 

6.   The  Rising  Value    of    Natural   Wealth    no    general 


50  Political    Economy. 

Gain.  —  When  a  useful  thing,  formerly  without  exchange 
value,  acquires  a  value  in  exchange  by  reason  of  an 
increase  of  demand,  it  is  well  to  observe  that  the  com- 
munity as  a  whole  gains  nothing  by  the  change.  The 
persons  who  own  the  existing  supply  of  the  article  are 
benefited,  but  their  gain  is  at  the  expense  of  the  rest 
of  the  community.  The  change  implies,  in  itself,  no 
increase  of  the  actual  things  owned  and  enjoyed  by 
the  community  as  natural  wealth.  There  is  simply  an 
increase  in  the  number  of  persons  wanting  those  things, 
with  the  result  that  there  is  less  for  each  than  there 
was  formerly. 

If  the  circumstance  that  causes  any  kind  of  natural 
wealth  to  acquire  an  exchange  value  be  a  lessening  of 
the  supply,  it  is  obvious  that  the  community  is  not 
only  not  richer,  but  is  even  poorer  by  reason  of  the 
change.  It  has,  so  far  as  this  portion  of  its  wealth  is 
concerned,  a  smaller  stock  of  useful  things  than  before. 
The  individual  owners  of  the  remaining  supply  may  gain 
by  the  change.  Their  gain,  however,  is  at  the  expense 
of  other  men.  If,  for  example,  the  supply  of  fresh 
water  should  become  so  reduced  as  to  acquire  a  con- 
siderable exchange  value,  the  owners  of  ordinary  springs 
might  be  enriched;  but  the  general  body  of  citizens 
would  be  poorer  than  before. 

When  the  natural  wealth  that  has  been  lessened  in 
supply  is  not  private,  but  public,  property,  nobody 
gains  by  the  change.  For  example,  the  diminished 
productiveness  of  the  fisheries  has  been  attended  by  a 


Natural   Wealth.  51 


rise  in  the  value  of  fish.  But  this  rise  is  only  suffi- 
cient to  compensate  the  fishermen  for  the  increased 
labor  required  in  catching  a  given  quantity.  The 
diminished  yield  is  a  simple  loss  to  everybody.  The 
same  principle  applies  to  the  present  scarcity  and  con- 
sequent high  value  of  game,  forest  -  trees,  fur-bearing 
animals,  etc.,  as  compared  with  early  times. 

This  last  remark  suggests  the  fact  that  some  kinds 
of  natural  wealth  are  unavoidably  diminished  by  the 
progress  of  civilization.  The  destruction  of  the  forests, 
together  with  the  -game  and  other  products  of  wild 
nature,  is  necessary  in  order  to  fit  the  land  for  agri- 
culture; and  it  is  needless  to  say  that  the  farms  are 
more  useful  and  a  greater  wealth  than  the  forests  they 
have  displaced.  But  it  is  none  the  less  true  that  the 
loss  of  the  forests  is  in  itself  a  loss  of  wealth.  If 
land  could  be  tilled  without  interfering  with  the 
growth  of  trees,  we  should  all  be  richer,  not  poorer, 
than  we  are.  Trees  for  fuel  and  for  building  purposes 
could  then  be  obtained,  in  most  places,  for  the  mere 
trouble  of  cutting  them  down  on  the  nearest  hill-side ; 
whereas  at  present  they  have  a  very  considerable  ex- 
change value  iii  ail  settled  regions. 


CHAPTER    VI.  . 

OF    LABOR    AND    ITS    PRODUCTIVENESS. 

1.  Productive  Labor.  —  Natural  wealth,  as  we  have 
seen,  is  the  basis  and  source  of  wealth  produced  by 
labor.  Any  human  exertion  devoted  to  procuring 
or  preparing  natural  wealth  for  the  uses  of  men  is 
called  Productive  Labor. 

Productive  labor  is  of  many  kinds.  First  and  most 
obviously,  it  includes  all  the  manual  labor  of  preparing 
tools,  implements,  buildings,  and  machinery  needed  in 
production ;  of  preparing  the  natural  agents  (e.  g.  land) 
and  procuring  the  raw  materials ;  of  working  up  these 
raw  materials  into  the  various  commodities  of  civilized 
life ;  and  of  carrying  on  the  exchange  of  products 
between  the  various  sets  of  producers,  —  including 
herein  the  necessary  labor  of  transportation. 

Productive  labor  includes,  secondly,  all  mental  efforts 
whose  aim  is  the  production  of  material  wealth.  Strictly 
there  is  a  mental  effort  involved  even  in  manual  labor 
of  the  simplest  kind.  But  there  are  some  kinds  of 
productive  Jabor  in  which  the  exertion  is  more  dis- 
tinctly that  of  the  mind.  This  is  true  of  the  labors  of 
merchants,  bankers,  book-keepers,  inventors,  managers, 
and  all  others  whose  task  lies  in  planning  and  directing 

62 


Productiveness  of  Labor.  53 

the  work  of  production  and  exchange.  Such  labors 
are  necessary  in  order  to  carry  on  production  effectively, 
and  are  as  truly  productive  as  is  the  labor  of  those  who 
come  into  actual  contact  with  the  things  produced. 

2.  Non-productive  Labor.  --  The  greater  part  of  the 
world's  labor  is  directed  to  the  production  of  wealth. 
But  we  have  many  needs  besides  those  that  material 
things  can  satisfy.  In  infancy  and  again  in  old  age 
we  need  nursing  and  care.  In  sickness  we  need  also 
the  help  of  a  physician.  Born  ignorant  and  with  many 
evil  propensities  to  overcome,  we  need  much  careful 
training,  instruction,  and  (on  our  own  part)  study,  in 
order  to  become  enlightened  and  useful  men  and  women. 
As  members  of  civilized  society  we  need  the  labors  of 
legislators,  judges,  administrators,  and  other  guardians 
of  law  and  civil  order.  These  and  many  other  sorts 
of  labor  we  need  not  as  producers,  but  as  men  and 
as  citizens  of  a  civilized  country.  We  should  need 
them  even  if  the  material  commodities  we  require  were 
supplied  to  us  without  effort  or  exertion  on  our  part. 
These  kinds  of  labor  we  shall  therefore  designate  as 
non-productive. 

Incidentally  non-productive  labor  may  help  in  the 
production  of  wealth.  When  a  teacher  reclaims  a 
vagrant  youth  and  converts  him  into  an  honest  laborer, 
or  a  physician  cures  the  ailment  of  a  producer  and 
restores  him  to  his  work,  or  the  civil  authorities  repress 
public  disorders,  the  act  has  in  each  case  the  effect 
of  increasing  production.  But  this  effect  is  undesigned, 


54  Political    Economy. 

or  at  most  secondary.  Besides  it  would  be  difficult, 
as  well  as  useless,  to  distinguish,  among  acts  of  this 
character,  those  that  are  indirectly  productive  from 
those  that  are  not  so.  We  shall,  therefore,  understand 
Productive  labor  to  mean  labor  whose  immediate  object 
is  the  production  or  exchange  of  wealth.  All  other 
labor  we  shall  regard  as  Non-productive. 

3.  The  Productiveness  of  Labor.  —  The  circumstances 
which  determine  how  great  an  amount  of  wealth  a 
man  may  produce  by  his  labor,  are  too  numerous  to 
admit  of  complete  enumeration.  They  are,  however, 
reducible,  for  the  most  part,  to  three  general  classes: 

(a)  The  working  capacity  of  the  man  himself,  his 
diligence,  energy,  intelligence,  and  endurance,  go  far  to 
determine  the  product.  These  are  points  in  which  men 
differ  very  much;  this  is  true  not  only  of  individuals 
but  to  a  considerable  extent  of  whole  nations  and 
races.  The  people  of  the  United  States  are  pre-emi- 
nent for  their  efficiency  as  laborers.  They  are  drawn 
mainly  from  those  branches  of  the  human  family  that 
excel  in  all  the  qualities  that  give  success  in  the  pro- 
duction of  wealth.  Further,  the  original  settlers  were, 
in  a  way,  picked  men  of  the  nations  to  which  they 
belonged,  since  none  but  men  of  courage  and  capacity 
would  face  the  dangers  and  hardships  of  the  long 
voyage  and  of  the  pioneer  life  that  it  brought  them 
to.  Of  the  subsequent  migration  of  Europeans  to  our 
country,  the  same  remark  holds  true  to  a  very  consider- 
able extent.  The  more  capable  and  enterprising  are 


Productiveness  of  Labor.  55 

those   most   ready  to  come;   the  sluggish  and   shiftless 
usually  stay  at  home. 

(b)  The    productiveness    of    a    man's    labor    depends 
largely  on  the  character  of  the  natural  wealth  he  hns 
free   access    to.      If   that   be  rich  and  copious,  and  all 
the  natural  conditions  be  favorable  to  his  industry,  his 
product  will  be  large  for  a  given  outlay  of  labor.     The 
people  of  the  United  States  are  highly  favored  in  these 
respects.     We  have  ample  areas  of  fertile  soil;   for  the 
most    part    we    have    a    favorable    climate ;    we    have 
almost  every  material  and    natural  facility  for    produc- 
tion.    Compared  with  the  extent  of  our  natural  wealth 
of  all  kinds,  our  population  is  small,  so  that  there  are 
comparatively  few  places  in   which  very  good  resources 
may  not  be  obtained  at  a  low  cost.     In  these  respects 
our   producers   have   great   advantages    over  the  inhab- 
itants of  older  and  more  crowded  countries. 

(c)  The  productiveness  of  labor  in  a  country  depends 
much  on  the  advancement  its  people  have  made  in  the 
arts  of   production,   that   is   to   say,   in    the   discoveries 
and  inventions  by  which  the  great  forces  of  nature  are 
made    to   aid   in    the    work   of   production.      There   are 
some  industries,  such  as  the  manufacture  of   cloth,  in 
which   it   is   probable   that   modern    machinery   enables 
men  to  produce  a  hundred  times  as  much  as  they  could 
produce   by   the    old   modes    of    hand-manufacture.     In 
every  sort   of  production  skilful    devices  may  do  much 
to  add    to   the   product,  or   improve    its    quality.     Here 
again    the    people    of   the    United    States    have    shown 


56  Political    Economy. 


great  capacity  for  the  invention  and  use  of  machinery, 
and  for  the  discovery  of  new  methods  of  production. 
The  intelligence  and  ingenuity  of  our  laborers  have 
"been  stimulated  into  great  inventive  activity  by  our 
Patent  Laws,  which  secure  to  every  inventor  the 
exclusive  '  right  to  manufacture  his  device  for  a 
limited  number  of  years. 

In  addition  to  these  general  causes  affecting  the 
productiveness  of  labor,  the  capacity  of  a  nation  for 
properly  organizing  and  managing  its  industries  de- 
serves to  be  mentioned.  The  industrial  system  of  a 
civilized  country  is  highly  complicated,  and  calls  for 
great  skill  on  the  part  of  those  who  arrange  its  details. 
How  best  to  divide  and  subdivide  the  work  among 
different  sets  of  laborers ;  what  grouping  of  the  various 
sets  is  most  advantageous ;  how  the  various  local  re- 
sources may  be  turned  to  best  account ;  how  large  a 
scale  of  production  under  a  single  management  gives 
the  best  results,  —  these  and  many  similar  questions 
must  be  solved  before  the  labor  of  a  country  can 
reach  its  full  capacity  for  production  of  wealth.  Wise 
and  skilful  management  turns  every  advantage  to  the 
best  account,  prevents  waste  of  labor  and  materials, 
and  thus  gives  us  every  commodity  for  the  least  pos- 
sible exertion. 

4.  Well-being  of  the  Laborer.  —  There  is  one  other 
general  remark  to  be  made  regarding  the  productive 
capacity  of  laborers,  and  that  is  that  the  productiveness 
of  labor  depends  much  on  the  state  of  eomfort  and 


Well-being  of  the  Laborer.  57 

contentment  in  which  the  laborers  are  maintained.  A 
certain  degree  of  comfort  is  necessary  in  order  simply 
to  keep  them  in  physical  vigor.  But  that  is  as  true 
of  dumb  animals  as  it  is  of  men.  Men  are  much 
influenced  by  their  state  of  mind  as  well  as  by  their 
state  of  body.  It  is,  therefore,  wise,  on  purely 
economic  grounds,  to  do  what  may  be  done  without 
injustice  to  others,  to  remove  real  or  fancied  grievances 
on  the  part  of  any  class  of  laborers.  Men  who  are 
satisfied  with  the  conditions  under  which  they  work, 
will  produce  more  and  better  results  than  men  who 
are  chafing  under  a  sense  of  wrong,  or  have  abandoned 
themselves  to  despair. 

For  this  reason,  as  well  as  on  higher  grounds,  slavery 
is  to  be  condemned.  It  deprives  the  laborer  of  every- 
thing which  could  spur  him  to  exert  his  powers.  For 
this  reason  also  every  other  unfair  or  oppressive  treat- 
ment of  laborers  is  contrary  to  the  general  interest. 
Cheerful  and  willing  workers  are  those  who  produce 
most  wealth. 


CHAPTER    VII. 

THE    NATURE   AND    NECESSITY   OP    CAPITAL. 

1.  Contrast  between  Savage  and  Civilized  Industry.  — 
Wherever  laborers  and  natural  wealth  exist,  production 
of  some  sort  is  possible.  In  those  parts  of  the  world, 
where,  without  the  aid  of  human  labor,  the  earth  bears 
copious  supplies  of  wild  fruits,  nuts,  and  edible  roots, 
men  may  find  a  rude  subsistence  without  other  tool  or 
implement  than  their  hands.  The  production  carried 
on  by  savage  races,  consisting  as  it  does,  for  the  most 
part,  in  merely  gathering  or  capturing  the  spontaneous 
growths  of  land  and  water,  requires  but  few  imple- 
ments, and  those  of  the  simplest  character. 

If  we  compare  the  production  carried  on  in  civilized 
countries  with  crude  production  of  this  kind,  we  find 
(in  addition  to  other  differences)  these  striking  points 
of  contrast:  First,  that  civilized  production  requires  a 
large  outfit  of  tools,  machinery,  buildings,  and  other 
appliances.  Secondly,  that  civilized  production  requires 
large  quantities  of  materials,  meaning  thereby  not  only 
things  in  their  natural  state,  but  also  things  that  have 
had  labor  bestowed  upon  them,  —  things  that  have 
passed  through  one  or  more  stages  of  production. 
Thirdly,  that  civilized  industry,  being  carried  on  b}r 

68 


TJiree  Forms  of  Capital.  59 

division  of  labor,  needs  to  have  large  quantities  of 
finished  commodities  always  on  hand,  for  purposes  of 
exchange. 

We  see,  then,  that  in  order  to  carry  on  civilized  pro- 
duction and  exchange  the  producers  must  have  the  use, 
at  any  given  moment,  of  the  results  of  much  previous 
labor.  To  these  results  of  past  labor  used  in  present 
production  and  exchange  the  general  name  of  Capital 
is  given. 

2.  Three  Forms  of  Capital.  —  The  capital  of  a  country 
consists  of  three  parts,  answering  to  the  three  needs 
spoken  of  above.  In  order  to  obtain  clear  views  as  to 
the  nature  and  uses  of  capital  it  will  be  necessary  to 
consider  each  of  these  portions  separately. 

(a)  The  plant  of  production.  This  includes  the 
buildings,  implements,  and  machinery  of  all  kinds  used 
in  production  and  exchange.  Under  this  head  we  in- 
clude also  many  things  which  would  not  ordinarily  be 
called  machinery ;  such  as  railways,  ships,  canals,  piers, 
and  the  like.  Also  we  include  money,  since  it  is  a 
product  of  labor  used  in  the  exchange  of  products. 
Also  we  must  include  the  changes  wrought  by  labor 
in  the  land  in  order  to  prepare  it  for  use  in  produc- 
tion. The  land  itself,  in  its  natural  state,  is  not  capital, 
because  it  is  not  a  product  of  labor.  The  capital  used 
in  agriculture  includes,  besides  buildings  and  imple- 
ments, everything  by  which  a  farm  differs  from  a 
forest.  That  is  to  say,  the  improvements  in  land  are 
capital,  though  the  land  itself  is  not. 


60  Political  Economy. 


(b)  Secondly,  materials  of  production  on  which,  or 
for  which,  labor  has  been  spent.  This  brings  us  again 
to  the  fact  that  the  production  of  a  commodity  is  in 
most  cases  not  a  single  act,  but  a  succession  of  acts. 
To  make  a  table  includes  cutting  down  the  tree,  sawing 
it  up,  drying  the  boards,  dressing  the  pieces  to  the 
required  shapes,  and  finally  fastening  them  together  in 
the  form  of  a  table.  To  make  a  coat  involves  raising 
the  wool,  combing  and  spinning  it,  dyeing  the  yarn, 
weaving  it  into  cloth,  fulling  the  cloth,  and  finally 
making  it  up  into  the  desired  garment. 

Now,  under  division  of  labor,  we  must  have  all  these 
operations  going  on  at  once.  The  saw-mill  must  have 
logs  on  hand;  the  drying  establishment  must  have 
boards  on  hand  getting  dried ;  and  the  cabinet-maker 
must  have  a  supply  of  seasoned  stock  on  hand  to 
select  from.  The  spinner  must  have  wool  on  hand ; 
the  dyer  must  have  yarn  in  his  vats;  the  weaver 
must  have  an  assortment  of  dyed  yarns ;  the  fuller 
must  have  unfulled  cloth  on  hand ;  and  finally  the 
tailor  must  have  a  supply  of  various  kinds  and  pat- 
terns of  cloth  to  draw  on  in  order  to  suit  the  tastes 
of  those  who  want  coats. 

If  anybody  doubts  that  these  products  of  past  labor 
are  necessary  in  order  that  the  labor  of  to-day  may  go 
forward,  let  him  imagine  how  things  would  stand  with 
the  cabinet-maker,  if  he  had  to  wait  till  the  tree,  cut 
down  this  morning,  should  be  ready  for  making  up  into 
tables;  or  how  it  would  fare  with  the  tailor  and  the  man 


Commodities  seeking  Exchange.  61 

who  wants  the  coat,  if  they  had  to  wait  for  the  cloth 
to  be  woven,  and  the  weaver  had  to  wait  for  the 
yarn  to  be  spun,  and  the  spinner  had  to  wait  for 
the  wool  to  be  grown. 

As  all  producers  are  to  work  every  day,  each,  except 
the  first  in  each  series,  must  have  a  supply  of  his 
proper  material  to  work  upon,  and  this  supply  must 
have  been  prepared  for  him  by  previous  labor  on  the 
part  of  those  performing  the  earlier  stages  of  the  work. 
It  is  obvious  also  that  in  all  cases  where  other  things 
are  needed  besides  machinery  and  the  material  operated 
on,  these  too  must  be  provided  in  advance.  The  most 
common  example  of  this  is  fuel  for  the  engine. 

Materials  on  which,  or  for  which,  no  labor  has  been 
expended,  are  not  capital.  Coal  in  the  furnace  -  room 
of  a  mill  is  capital,  but  not  so  coal  in  its  native  seam. 
Logs  in  the  timber-pond  are  capital,  but  forest -trees 
are  not.  The  crop  growing  on  a  farm  and  the  cattle 
on  a  ranch  are  capital;  but  the  fishes  in  our  rivers 
and  lakes  and  the  wild  animals  in  our  forests  are 
not. 

( c )  Capital  in  commodities  seeking  exchange.  —  The 
third  form  of:  Capital  is  connected  with  division  of 
labor.  It  consists  of  commodities  awaiting  exchange. 
The  difficulty  of  selling  products  has  already  been 
spoken  of.  We  are  not  here  concerned  merely  with 
the  labor  it  involves,  which  is  greater  in  many  cases 
than  the  labor  of  actually  producing  the  articles. 
The  chief  point  to  notice  at  present  is  that,  in  order 


62  Political    Economy. 


to  carry  on  exchange  of  products,  we  need  to  have 
great  masses  of  commodities  of  all  kinds  continually 
on  hand  in  the  stores  and  warehouses.  These  com- 
modities are  capital,  products  of  labor  used  in  ex- 
change. Production  cannot  go  on  without  them. 

Inventions  have  done  much  to  cheapen  the  pro- 
duction of  things;  but  beyond  diminishing  the  cost 
of  transportation,  little  has  been  done  to  cheapen  ex- 
change. In  fact,  considering  the  tendency  of  recent 
times  to  erect  very  costly  buildings  for  use  as  stores 
and  shops,  and  to  multiply  the  number  of  them 
everywhere,  we  may  fairly  question  whether  exchange 
has  been  cheapened  at  all. 

Just  how  great  a  number  of  shops,  and  how  great 
supplies  of  finished  commodities  displayed  in  them, 
may  be  necessary  for  carrying  on  exchange  in  the 
most  economical  way,  it  would  be  impossible  even 
to  conjecture.  It  is  only  evident  that  we  need  here 
a  large  accumulation  of  products  of  past  labor,  and 
that  the  more  the  community  is  willing  to  pay  for 
convenience  and  sumptuousness  of  service  in  its  buy- 
ing and  selling,  the  more  numerous  and  costly  and 
fully  stocked  the  stores  and  shops  will  be. 

3.  Production  in  Progress.  -  -  Viewing  now  the  pro- 
ductive system  as  a  whole,  and  at  work,  we  may 
think  of  its  results  as  a  stream  of  commodities 
flowing  day  by  day  into  the  reservoirs  of  trade, 
and  through  these  into  the  homes  of  the  people. 
This  stream  is  made  up  of  many  smaller  streams, — 


Capital  is  Consumed.  63 

each  industry  contributing  its  quota  to  the  flow.  Con- 
tinuing the  figure,  we  may  say  that  each  of  these 
lesser  streams  has  at  its  fountain-head  the  laborers 
who  draw  the  original  materials  from  the  earth ;  the 
other  laborers  in  the  industry,  each  in  his  place, 
are  engaged  in  forwarding  and  transforming  these 
materials,  stage  by  stage,  towards  the  final  form  in 
which  they  are  to  be  received  by  the  consumer. 

Out  of  the  reservoirs  of  trade  every  man  receives 
the  reward  of  his  exertions,  —  the  daily  food,  clothing, 
and  whatever  of  other  comforts  and  luxuries  he  may 
have  earned.  The  larger  the  stream  of  products  the 
more  the  community  will  have  to  divide  and  enjoy, — 
for  everything  in  it  goes  to  somebody.  How  each 
man's  share  is  determined,  we  shall  consider  later. 

4,  Capital  is  Consumed.  —  It  follows  from  the  nature 
of  the  uses  Capital  is  put  to  that  it  is  perpetually 
undergoing  transformations.  The  portion  that  consists 
of  materials  is  in  a  constant  state  of  change  until 
it  eventually  is  carried  as  finished  commodity  into 
the  stores  and  shops ;  from  here  it  sooner  or  later 
passes  into  the  hands  of  the  consumer  and  ceases 
to  be  capital.  But  it  is  replaced,  in  the  natural 
course  of  production,  by  new  materials  and  new 
products  coming  forward  all  the  time  by  the  action 
of  the  producers.  Once  provided  with  capital  and 
started  on  its  present  basis,  production  itself  keeps 
up  the  stock  of  capital,  so  far  as  the  portions 
consisting  of  materials  and  of  commodities  awaiting 


64  Political    Economy. 

exchange  are  concerned.  We  could  not  produce  the 
kinds  of  commodities  we  do  produce,  and  use 
division  of  labor,  without  creating  these  forms  of 
capital,  even  if  they  did  not  exist  before.  This  is 
simply  putting  in  other  words  the  proposition  that 
capital  is  necessary  for  civilized  production;  it  is  in 
fact  inseparable  from  it. 

As  to  the  other  portion  of  capital,  which  consists 
of  machinery,  buildings,  railways,  and  the  like,  the 
case  is  somewhat  different.  This  form  of  capital  is 
also  consumed,  but  more  slowly  than  the  other 
portions.  The  machinery  wears  out,  the  buildings  and 
ships  decay.  These,  however,  are  not  inevitably  and, 
as  it  were,  unconsciously  replaced  by  the  mere  course 
of  production  itself.  A  portion  of  the  labor  of  the 
country  has  to  be  diverted  from  the  work  of  directly 
producing  commodities,  to  the  work  of  providing  the 
tools,  machinery,  and  other  equipment  designed  to 
assist  that  production. 

Fixed  and  Circulating  Capital.  —  The  greater  lasting  power  of 
machinery,  buildings,  etc.,  has  led  economists  to  distinguish  this 
portion  of  Capital  as  Fixed,  the  remainder  being  designated  as 
Circulating  Capital.  The  latter  includes  all  parts  of  capital  that 
are  consumed  at  a  single  use:  e.  g.  the  wool  used  by  the  spinner, 
the  grain  used  by  the  miller,  the  fuel  used  for  the  engine,  etc. 
On  the  other  hand,  all  tools  and  implements  belong  to  Fixed 
Capital,  on  the  ground  that  they  are  not  used  up  at  a  single  use. 
The  distinction  is  not  important  except  so  far  as  it  bears  on 
the  law  of  wages,  and  for  this  purpose  it  is  far  from  covering 
the  whole  principle  with  which  it  is  connected,  viz.,  the  element 
of  Time  in  production. 


CHAPTEK    VIII. 

CAPITAL   REPRESENTS    INDUSTRIAL   IMPROVEMENTS. 

1.  The    Capital    of   To-day    a    Legacy.  —  The    present 
generation    inherited    from    the    one    just   preceding    it 
a    productive     system     equipped    with     materials    and 
machinery.        The     same     is     true     of     every     other 
generation    of  men    since    the    dawn    of    history.     Each 
inherited    capital    from    its    predecessor.      The    propor- 
tion   of     capital    was     undoubtedly     smaller    in    early 
times    than    it    is    now;     but    our     ancestors,    as    far 
back    as    we    know    anything    of    them,  had    industrial 
knowledge     and    capital     for     turning     it    to    account. 
As    men's    knowledge    increased,    and    improved    ways 
of     using     the      productive      forces     were     invented, 
additions     have    been     made    to    the    world's     capital, 
until   it    is    what   we  find  it.      To    those    who    already 
have    capital,    increase    is    comparatively    easy.      With 
the    old    tools    new    ones    can    be    made.       But    how 
did    the    progenitors    of   our   race    produce    their    first 
capital  ? 

2.  The    Beginnings    of    Capital.  —  The    only    answer 
we    can    give    to    this    question    is    to    consider    briefly 
the     circumstances     in     which     a     community     would 
naturally   become  possessed  of   capital.     We  must  sup- 

65 


66  Political    Economy. 

pose  some  member  of  the  community  to  have  discovered 
a  new  and  better  way  of  getting  food,  clothing,  or 
some  other  needful  thing,  —  which  new  way  promises 
larger  returns  for  labor,  but  at  the  expense  of  wait- 
ing longer  than  hitherto  for  the  finished  product 
to  appear.  Without  this  knowledge  there  would  be 
neither  motive  nor  room  for  the  existence  of  capital. 
In  the  second  place,  we  must  suppose  the  community, 
or  some  of  its  members,  to  have  spare  time  and 
strength  left  over  after  providing  for  their  daily 
necessities;  otherwise  they  could  produce  no  capital, 
since  the  production  of  capital  requires  the  expendi- 
ture of  labor  in  some  way  that  promises  no  imme- 
diate result  good  for  human  use.  In  the  third  place, 
they  must  be  diligent  and  enterprising  enough  to  use 
this  spare  time  in  the  manner  their  new  discovery 
suggests,  for  the  sake  of  the  future  benefit  it  promises. 

Given  these  conditions,  capital  will  inevitably  spring 
into  existence. 

3.  Capital  may  be  created  by  working  for  the 
Future.  —  As  to  the  precise  mode  of  creating  capital 
in  such  a  case,  there  would  be  several  alternatives 
open.  It  may  help  to  clear  up  our  notions  regarding 
the  nature  of  capital,  if  we  consider  these  alternatives 
briefly.  Taking  as  primitive  a  case  as  possible,  let  us 
imagine  a  community  that  has  subsisted  hitherto  on 
roots,  nuts,  berries,  and  such  varieties  of  fish  and  game 
as  can  be  captured  without  laborious  contrivances  of 
any  kind. 


How  Capital  may  be  created.  67 

Supposing  now  that  a  member  of  this  community, 
by  happy  accident,  discovers  the  superiority  of  some 
particular  root,  say  the  potato,  when  grown  in 
loose  soil,  in  an  open  place  where  it  has  plenty  of 
sun  and  no  weeds  to  retard  its  growth,  over  the 
same  plant  grown  in  the  Imp-hazard  way  of  wild 
nature.  To  make  use  of  this  discovery  will  require 
much  preliminary  labor  in  clearing  the  ground,  gath- 
ering good  specimens  for  seed,  planting  them  and 
protecting  them  while  they  grow,  weeding,  etc. 

This  is  a  case  in  which,  I  think,  the  work  would 
naturally  be  done  little  by  little,  in  the  spare  time 
left  over  after  providing  for  daily  wants.1  It  would 
naturally  be  tried  on  a  small  scale  at  first,  in  order 
to  be  quite  sure  that  the  discovery  was  a  real 
advantange,  —  worth  the  labor  of  putting  it  into 
practice.  As  each  successive  crop  showed  more  and 
more  conclusively  the  value  of  the  discovery,  a 
larger  area  would  gradually  be  cleared  and  planted, 
until  finally  the  raising  of  potatoes  became  a  regular 
source  of  food  supply.  In  this  case  the  improvement 
of  the  land,  the  necessary  seed,2  and,  in  its  season, 
the  growing  crop,  would  be  capital. 

If,   instead  of  an  agricultural  discovery,  the  new   idea 

1  We  may  suppose  the  daily  consumption  to  be  reduced  in  order 
to  gain  time  for  the  new  work,  —  if  such  reduction  be  possible. 

2  The     land     itself,     as     already    stated,    is    not    Capital,  —  not 
being  a  product  of    human  labor.      By  the    "improvement  of  the 
land"  we  mean  the   changes  made   in  or  upon  it  by  labor,  with 
a  view  to  production:  for  example,  the  removal  of  trees,  levelling 
the  hillocks,  plowing,  fencing,  etc. 


68  Political  Economy. 

happened  to  be  the  construction  of  a  weir  for  capt- 
uring fish  by  the  flow  and  ebb  of  the  tide,  the  same 
mode  of  procedure  would  be  open.  The  labor  of  con- 
structing the  weir  could  be  done  in  whatever  time 
could  be  spared  from  getting  food  and  other  neces- 
saries in  the  old  way,  —  partly,  perhaps,  by  stinting  the 
consumption  of  these  things  in  order  to  have  more  time 
for  the  new  work.  The  weir  would,  in  this  case,  be 
the  resulting  Capital.  Till  finished,  it  would  of  course 
add  nothing  to  the  daily  food  supply. 

4,  Capital  may  be  created  by  Saving,  —  It  is  obvious 
that,  in  both  of  these  cases,  the  man  making  the 
improvement  might  proceed  differently.  He  might 
begin  by  saving  up  a  supply  of  food  obtained  in  the 
old  way,  by  working  harder,  and  perhaps  consuming 
less  than  usual,  in  order  to  be  able  presently  to  devote 
his  time  entirely  to  the  work  of  making  the  improve- 
ment. This  course,  however,  would  be  less  likely  to 
be  adopted  than  the  other,  both  because  it  seems  to 
call  for  more  energy  and  self-denial  than  the  other ; 
and  because  the  kinds  of  food  accessible  in  such  a  case 
as  we  are  considering,  are  hard  to  preserve  for  any 
length  of  time,  and  always  lose  something  by  keeping. 
If  it  should  be  adopted,  the  store  of  food  and  other 
necessaries  would  •ordinarily  be  called  capital.  For, 
though  not  strictly  used  in  production,  it  is  accumu- 
lated for  a  productive  purpose.1 

1  If  such  a  store  were  used  merely  as  the  means  of  living  for  a 
time  in  idleness,  it  would  not  be  Capital. 


How  Capital  may  }>e  created.  69 

We  shall  see  later  that  in  an  advanced  state  of 
society,  the  more  common  mode  of  creating  new 
capital  is  by  thus  saving  the  means  of  support  for 
laborers  in  advance.  But  it  is  never  the  sole  mode. 

5.  A    Third    Alternative.  —  If,    instead    of    a    single 
producer,  several   producers  should   unite  to   make  the 
improvement;    or   if   the    single    producer   should   have 
dependents     or     slaves     to     assist     him,     still    another 
method    would    be    open.      Some    of    those    concerned 
could   devote   their   time    entirely   to  the  new  work  of 
creating   capital,   while    the    rest   provided,  by    the    old 
way,  enough  of   the   necessaries    of   life  for   the   whole 
number,   until   the   new    method   of    production    began 
to   yield    its    returns.      For    a    time    they    would    have 
to  work    harder    than    formerly,  or    consume    less    than 
formerly,    or    both,    in     order    to     obtain    the     capital 
necessary   for   putting   the  new    discovery  or   invention 
into  practical  use.     Thus  the  creation  of  Capital  implies 
a  present  sacrifice  for  a  future  gain. 

6.  Capital   facilitates  the  Creation  of  more  Capital.— 
If    the    new    contrivance    should    prove    successful,    it 
would  presently  add  to  the  productiveness  of  the  labor 
of  the  community.     Its    members  would    have  more  to 
enjoy  than  formerly,  without  working  any  harder.     They 
would  therefore  be  in  a  better  position  to  take  advantage 
of  any  fresh  invention  that  might  occur  to  them.     They 
could   more    easily  spare    the   labor   required   to  put  it 
into  practice. 

Thus,  every  step  in  advance 


UNI7BR3IT7] 


70  Political    Economy. 

step  easier.  This  is  especially  true  in  relation  to 
mechanical  inventions.  The  making  of  the  first  tools 
and  implements  ever  made  in  the  world  must  have 
been  a  very  slow  and  painful  process,  —  for  tools  are 
needed  in  making  tools.  Men  must  have  worked 
longer  and  harder  to  make  a  wretched  axe  of  stone, 
in  the  so-called  stone-age  of  the  world,  than  they  now 
work  to  get  a  whole  outfit  of  cutting  tools  made  of 
steel.  Not  only  so,  but  it  must  have  been  infinitely 
harder  for  them  to  spare  time  from  the  struggle  for 
daily  food,  for  the  purpose  of  making  tools. 

7.  Civilization  and  Capital.  —  We  thus  see  that  in 
every  way  capital  and  civilization  go  together,  and 
grow  together.  Increasing  knowledge  of  nature  and 
natural  laws  comes  with  the  experience  and  observa- 
tion of  successive  generations.  The  ingenuity  of  men 
is  always  ready  to  suggest  contrivances  by  which  the 
new  knowledge  may  be  turned  to  account  in  producing 
wealth. 

With  rare  exceptions,  every  new  contrivance  de- 
mands a  larger  outlay  of  labor  without  immediate 
return,  than  was  demanded  by  the  old  devices.  It  de- 
mands more  waiting  or  longer  waiting  after  the  outlay 
of  labor,  as  the  price  of  its  larger  yield.  Unless  men 
are  ready  to  bestow  labor  on  these  terms,  the  new 
idea  remains  a  mere  idea.  How  many  happy  concep- 
tions have  failed  to  be  put  into  use  in  the  world's 
history,  because  no  man  was  able  and  willing  to  make 
the  sacrifice  of  present  ease  and  comfort  required  for 


How  Capital  may  be  Created.  71 

introducing  it,  we  shall  never  know.  But  it  is  more 
than  probable  that  there  have  been  many  such  cases. 

The  many  peoples  of  the  world,  who  are  still  living 
in  poverty  and  barbarism,  can  hardly  be  wholly  igno- 
rant, all  of  them,  of  the  better  ways  of  production  de- 
veloped by  the  nations  of  Western  Europe  and  America. 
They  lack  the  energy  and  self-denial,  rather  than  the 
knowledge,  required  for  the  creation  of  Capital. 

8.  Two  Sets  of  Helpers.  —  From  all  this  it  follows 
that  two  sets  of  men  have  conferred  great  industrial 
benefits  on  their  fellow-men :  first,  the  inventors  and 
discoverers  who  have  suggested  new  and  better  ways 
of  production :  secondly,  those  who,  by  their  willing- 
ness to  labor  and  wait  for  their  return,  or  to  accept 
future  instead  of  present  commodities,  have  furnished 
the  means  of  putting  these  improvements  into  actual 
operation.  The  work  of  the  inventor  —  the  idea  —  goes 
first :  the  labor  and  waiting  required  for  putting  it 
into  practice  come  later.  Both  are  necessary  in  order 
to  give  us  the  blessing  of  easier  and  better  ways  of 
producing  wealth. 

It  may  perhaps  seem  strange  to  some  of  my  readers 
to  call  such  things  as  a  weir,  or  an  axe,  or  the  culti- 
vation of  the  land,  an  "improvement  in  production." 
But  unless  we  are  to  believe  that  men  were  created 
with  a  large  knowledge  of  productive  devices,  there 
must  have  been  a  time  when  the  very  simplest  and 
commonest  parts  of  our  present  knowledge  came  as  a 
new  discovery  or  invention. 


CHAPTEE    IX. 

TWO    CLASSES    OF   PRODUCERS:    EMPLOYERS   AND 
LABORERS. 

1.  Comparatively  Few  Men  own  Capital.  —  Nothing 
has  been  said  hitherto  about  the  familiar  division  of 
producers  into  the  two  classes  known  as  Employers  and 
Laborers.  For  the  sake  of  simplicity,  I  have  spoken 
as  if  every  producer  supplied  the  capital  requisite  for 
carrying  on  his  industry.  We  must  now  consider  the 
highly  important  fact  that  the  enormous  capital  used 
in  production  and  exchange  belongs,  in  the  main,  to 
a  comparatively  small  number  of  persons. 

We  have  already  seen  that  for  the  production  of 
capital,  labor  must  be  spent  in  ways  that  promise  no 
immediate  return.  Capital  is  the  result  of  labor  and 
waiting.  Now  we  know  that  people  differ  very  much 
in  the  power  and  willingness  to  wait  for  good  things. 
To  the  eager  and  passionate,  such  waiting  is  much 
more  irksome  than  it  is  to  the  cool  and  sedate.  Some 
are  by  nature  careless  and  improvident,  ready  to  "  let 
the  future  take  care  of  itself";  others  are  naturally 
thrifty,  anxious  to  increase  their  possessions,  always 
willing  to  forego  present  enjoyment  for  the  sake  of 
future  advantage. 
72 


Two  Classes  of  Producers.  73 

The  nature  of  production  puts  these  qualities  to  the 
test.  Those  who  are  not  willing  to  work  for  a  distant 
object,  decline  to  fulfil  the  conditions  on  which  alone 
large  returns  can  be  obtained  for  their  labor.  They 
doom  themselves  in  advance  to  a  life  of  rude  poverty, 
such  as  that  led  by  our  native  Indians,  or  to  a  life 
of  dependence  on  whatever  other  men  may  offer  in 
exchange  for  labor,  as  is  the  case  with  so  many  laborers 
in  all  countries. 

On  the  other  hand,  those  who  have  the  foresight 
and  strength  of  will  to  meet  fairly  the  whole  burden 
of  civilized  production,  who  are  ready  not  only  to  labor 
but  to  wait  as  long  as  need  be  for  the  enjoyable  re- 
sults, are  able  to  win  the  largest  and  best  rewards  for 
their  exertions.  Not  only  so,  but  they  are  enabled, 
by  the  possession  of  capital,  to  make  gain  by  hiring 
their  less  provident  neighbors  to  work  for  them.  Once 
possessor  of  enough  capital  to  employ  even  a  small 
number  of  laborers,  a  man  is  usually  able  to  gain  a 
livelihood  without  further  manual  labor  on  his  own 
part.  His  task  becomes  that  of  directing  and  controll- 
ing the  labor  of  other  men.  The  possessor  of  large 
capital  is  even  able  to  relieve  himself  of  the  trouble 
of  managing  industry ;  he  can  live  in  comfort  on  the 
interest  of  his  capital  by  loaning  it  to  employers. 

The  familiar  differences  between  men  as  regards  care 
for  the  future  are  therefore  »of  great  consequence, 
socially  and  economically.  They  must  be  relied  on 
chiefly  to  explain  the  fact  that  some  men  have  capital 
while  others  have  none. 


74  Political    Economy. 


Of  course  men  have  not  at  the  present  time,  perhaps 
they  have  never  had,  equal  opportunities  for  acquiring 
capital.  Some  have  inherited  wealth,  while  others 
have  inherited  nothing.  In  this,  as  in  other  respects, 
the  shortcomings  of  the  fathers  are  visited  upon  the 
children.  The  man  who  has  inherited  even  a  little 
can  add  to  it  more  easily  than  the  man  who  has 
nothing  can  acquire  the  beginnings  of  capital.  It  is 
the  first  sti-ps  that  are  hard. 

Yet  we  may  safely  believe  that,  apart  from  mis- 
fortune, the  cases  are  rare  in  our  country,  in  which 
diligence  and  thrift  would  fail  of  winning  some 
amount  of  capital.  The  chief  obstacle  is  lack  of  will, 
the  natural  inclination  of  most  men  to  consider  the 
present  rather  than  the  future,  and  to  work  only  in 
such  ways  or  on  such  terms  as  promise  speedy  returns. 
Though  well  aware  that,  by  adding  the  sacrifice  of 
waiting  to  tlu  sacrifice  of  labor,  they  might  presently 
increase  to  an  indefinite  extent  the  rewards  of  their 
industry,  they  make  no  attempt  to  avail  themselves 
of  the  opportunity. 

Let  us  be  clear,  once  for  all,  that  the  richest  man 
is  under  constant  temptation,  just  as  the  poor  man  is, 
to  spend  his  whole  income  in  immediate  enjoyment 
instead  of  turning  it  into  capital.  It  is  only  by  resist- 
ing this  temptation  that  anybody,  rich  or  poor,  has 
ever  acquired  or  maintained  capital.  Those  who  resist 
it  successfully  are  our  capitalists. 

2.    Distinction  between  Savings  and  Capital.  —  The  fact 


Savings  and  Capital.  75 

that  the  mass  of  laborers  work  for  wages  rather  than 
for  the  final  products  of  their  labor,  has  an  important 
effect  on  the  mode  by  which  those  who  desire  to 
have  capital  may  set  about  obtaining  it.  The  pres- 
ence of  laborers  ready  to  work  for  wages  makes  it 
possible  to  acquire  working  capital  in  return  for  mere 
savings,  —  i.  e.  for  finished  commodities,  or  the  means 
to  buy  finished  commodities.  This  is  therefore  the 
course  usually  followed  in  f  practice.  The  person  de- 
siring to  possess  capital  saves  his  income,  or  borrows 
other  men's  savings,  and  uses  the  amount  so  obtained 
in  paying  wages  to  laborers  for  producing  the  desired 
capital. 

For  this  reason  it  is  common  to  speak  of  savings  as 
capital.  But  capital  is  the  equipmaut  for  producing 
and  exchanging  commodities ;  it  is  the  necessary  means 
for  effective  industry.  Savings,  on  the  other  hand,  are 
the  completed  results  of  production  and  exchange, — 
commodities  (or  the  means  to  buy  commodities)  which 
the  owner  chooses  not  to  consume  but  to  spare  for 
hiring  laborers.  When  turned  over  to  the  laborers, 
these  commodities  are  not  used  to  assist  production  ; 
they  are  consumed  by  the  laborers  and  their  families 
just  as  they  might  have  been  consumed  by  the  original 
owner. 

To  say  that  savings  are  capital,  or  are  a  necessity 
of  production,  is  to  look  on  industry  solely  from  the 
point  of  view  of  the  employer;  is  to  regard  the  la- 
borers not  as  men  but  as  mere  animals  for  use  in 


76  Political 


production,  and  needing  to  be  fed  and  clothed  by 
other  men,  in  order  that  they  may  be  able  to  work 
effectively.  No  man  can  be  an  employer,  in  the 
present  sense  of  the  word,  without  the  use  of  savings. 
But  capital,  as  we  have  already  seen,  can  be  produced 
without  the  necessity  of  some  men  saving  in  order  to 
pay  other  men  wages. 

It  is,  strictly,  only  for  the  payment  of  wages  in 
advance  of  production  that  savings  are  necessary.  In 
order  that  some  men  may  have  wages,  other  men 
must  save  the  means  of  paying  them.  In  other  words, 
if  some  men  must  have  a  reward  for  their  labor 
sooner  than  production  yields  it,  then  other  men  must 
postpone  the  enjoyment  of  their  reward  beyond  the 
point  at  which  production  yields  it.  One  man's  wages 
can  only  come  from  another  man's  savings. 

But  there  is  surely  no  necessity  or  reason  in  the 
nature  of  production,  why  the  burden  of  the  necessary 
waiting  should  be  borne  by  different  persons  from 
those  who  perform  the  labor.  That  is  rather  a  conse- 
quence, originally,  of  the  very  unequal  degrees  in 
which  men  are  gifted  with  the  readiness  to  work  for 
future  advantage,  —  partly  also,  now,  a  natural  conse- 
quence of  the  existing  inequalities  of  wealth. 

As  capital  is,  in  practice,  usually  provided  through 
the  savings  of  the  few,  no  serious  error  is  likely  to 
arise,  except  in  treating  wages,  from  confounding 
savings  with  working  capital.  It  is  customary  to 
speak  of  "saving  capital,"  and  we  may  safely  enough 


The  Basis  of  WoAje-paying.  77 

follow  the  general  usage,  understanding  the  phrase  as  a 
short  expression  for  "saving  the  means  to  pay  labor- 
ers for  producing  capital." 

3.  Incidental  Results  of  Wage-paying,  —  It  is  of  course 
in  the  nature  of  working  for  wages  that  the  product  of 
the  labor  belongs  to  the  employer.  'That  is  the  basis 
of  the  bargain.  Yet  some  persons  talk  and  write  as  if 
the  laborer  had  still  a  reserved  claim  upon,  or  a  right 
of  some  kind  in,  the  product  of  his  labor.  All  such 
assumptions  are  foolish  and  vain,  —  as  foolish  and  vain 
as  it  would  be  to  argue  that  the  person  selling  a  com- 
modity has  a  right  both  to  the  thing  sold  and  to  the 
thing  he  receives  in  exchange  for  it. 

Under  the  system  known  as  "Profit-Sharing"  there 
is  a  right  expressly  reserved  to  the  laborers  of  sharing 
in  any  profit  that  may  be  made  beyond  a  certain  fixed 
rate.  But  this  is  not  a  simple  case  of  working  for 
wages.  The  manager,  in  profit-sharing,  agrees  to  pay  in 
advance  a  certain  amount,  presumably  less  than  the  cur- 
rent rate  of  wages,  and  a  further  sum,  greater  or  less, 
at  the  close  of  the  year,  —  the  precise  amount  to  depend 
on  the  success  of  the  business  in  the  meantime.  This 
arrangement  does,  by  inference,  give  the  laborers  a  re- 
served claim  upon  the  product,  —  a  right,  for  example, 
to  object  to  any  course  that  should  lessen  its  value. 
But  in  the  ordinary  case  of  hiring  for  wages  there  is 
no  such  right. 

A  second  result  of  wage-paying  is  that  the  employer 
bears  all  the  pecuniary  risks  of  production.  The  la- 


78  Political    Economy. 

borers  get  their  wages  whether  the  enterprise  turns 
out  well  or  ill.  For  the  employer  there  is  always  some 
risk  of  losing  his  savings,  —  especially  so  in  the  pro- 
duction of  things  that  are  at  all  subject  to  sudden 
change  of  taste  and  fashion.  He  may  find  that  he  has 
produced  the  wrong  article,  or  the  wrong  variety  of  it, 
and  may  find  no  buyers  for  his  product  except  at  a  loss. 

There  is  a  further  risk  of  loss  to  employers  by  the 
overproduction  of  any  particular  commodity.  A  few 
producers  of  any  article  have  the  power  to  bring  em- 
barrassment and  loss  on  all  producers  of  it  by  reckless 
increase  of  the  supply. 

Under  the  system  of  producing  only  to  fill  orders, 
which  is  common  in  some  branches  of  manufacturing, 
these  risks  are  assumed  by  the  capitalist,  merchant,  or 
dealer,  who  gives  the  order.  The  risk  under  this  plan 
is  probably  lessened,  since  the  dealer  has  better  oppor- 
tunities for  watching  the  tendencies  of  the  market 
than  the  manufacturer  has.  But  the  risk  can  never 
be  wholly  done  away  until  a  plan  is  devised  by  which 
things  may  be  produced  only  in  response  to  orders  from 
consumers.  It  is  needless  to  say  that  such  a  plan  is 
very  unlikely  to  be  devised. 

Apart  from  the  general  risks  attending  all  produc- 
tion under  division  of '  labor,  some  industries  have 
special  risks  of  their  own.  In  farming,  for  instance, 
there  are  dangers  from  unfavorable  weather,  the  at- 
tacks of  destructive  insects,  etc.  In  mining  there  is 
danger  from  fire,  exhaustion  of  the  deposit,  etc.  In  the 


Advantages  of  the    Wages  System.  79 

manufacture  of  gunpowder  there  is  constant  danger 
of  loss  by  explosion.  These  risks,  so  far  as  they  affect 
property,  are  borne  by  the  employer. 

4.  Advantages  of  the  Wages  System.  —  As  the  em- 
ployer bears  the  pecuniary  risks  of  production,  and 
owns  the  product  when  completed,  it  is  natural  that 
he  should  have  complete  direction  of  the  business. 
Wherever  the  laborers,  even  if  supplied  with  capital, 
are  too  ignorant  to  manage  the  work  of  production, 
or  to  choose  efficient  managers  "to  act  for  them,  the 
control  of  a  wise  employer  is  undoubtedly  an  advan- 
tage for  all  concerned.  It  prevents  waste  of  labor 
through  short-sighted  and  inefficient  modes  of  produc- 
tion. In  those  industries  that  need  the  joint  action 
of  large  bodies  of  laborers,  the  managing  rights  of  the 
employer  are  particularly  important.  Laborers  have  not 
always  had  the  education  and  training  that  would 
qualify  them  even  for  choosing  wise  directors  in  such 
industries,  —  to  say  nothing  of  their  ability  to  pro- 
nounce on  difficult  questions  of  general  business  policy. 
It  may  therefore  be  taken  for  granted  that,  so  far  as 
regards  the  mere  question  of  management,  the  wages 
system  has  been  generally  favorable,  in  the  past,  to 
wise  and  efficient  direction  of  all  large  industrial 
enterprises. 

Again,  the  regularity  and  certainty  of  the  reward 
for  labor  under  the  wages  system  is  a  clear  advantage. 
For  persons  whose  income  must,  in  any  event,  be 
small,  it  is  important  to  know  exactly  how  much 


80  Political    Economy. 

they  are  to  receive,  and  when  they  are  to  receive  it. 
They  can  then  arrange  their  scale  of  expenditure  on 
a  safe  basis.  Any  risk  of  delay  in  receiving  their 
earnings,  or  any  uncertainty  as  to  the  amount  to  be 
received,  is  burdensome  in  such  cases. 

Another  great  and  obvious  advantage  of  the  wages 
system  is  that  it  provides  the  whole  labor  force  of  the 
country  with  abundant  capital.  The  amount  of  capital 
available  for  each  laborer  is  made  as  great,  not  as  the 
laborer  himself  would  have  made  it,  but  as  those 
would  have  it  who  are  most  able  and  willing  to  save. 
The  labor  of  the  man  who  owns  no  capital  is  thus 
supplied  with  a  full  equipment  of  the  most  effective 
devices  for  increasing  production. 

The  resulting  increase  of  product  goes  mainly  to  the 
hired  laborer  himself.  The  gains  of  the  employer  are 
easily  reckoned,  being  the  difference  between  his  pay- 
ments and  his  receipts.  But  the  laborer  who  has  no 
capital  of  his  own  is  the  great  gainer  by  the  wages 
system,  though  his  gain  is  less  easily  measured  than 
his  employer's,  and  is  often  quite  forgotten. 

In  order  to  tell  how  much  the  laborers  of  a  civil- 
ized country  are  benefited  by  the  savings  of  other 
men,  we  should  need  to  know  how  much  they  could 
produce,  with  little  or  no  capital,  if  thrown  entirely 
on  their  own  resources.  We  can  only  be  sure  that,  in 
comparison  with  even  the  lowest  wages,  the  amount 
would  be  small.  The  whole  excess  of  wages  above 
what  could  be  so  produced  is  a  clear  gain  to  the 


Defects  of  the   Wages  System.  81 

laborers  from  being  hired.  It  is  a  benefit  accruing  to 
them  from  the  presence  of  capital  which  they  have 
done  nothing  towards  accumulating. 

5.  Some  Disadvantages  of  the  Wages  System.  —  On 
the  other  hand,  it  must  be  admitted  that  production 
by  hired  labor  has  some  serious  drawbacks.  On  the 
side  of  the  laborer  it  is  unfavorable  to  efficiency. 
The  hired  laborer  has  no  direct  and  personal  interest 
in  the  product  of  his  labor.  Any  immediate  gain 
from  improving  its  quality,  or  increasing  its  quantity, 
goes  to  the  employer.  The  same  is  true  of  the  benefit 
arising  from  any  saving  in  materials  or  needless  wear 
and  tear  of  machinery  and  buildings.  The  hired  la- 
borer lacks  the  personal  incentive  to  make  the  best 
use  of  his  labor  and  to  turn  everything  to  the  best 
account. 

While,  therefore,  the  wages  system  has  undoubtedly 
been  favorable  to  efficiency  and  far-sightedness  in 
management,  it  depends  too  much  on  the  presence 
and  watchfulness  of  the  manager.  The  "  hireling "  has 

O  O 

always  been  proverbial  for  slackness  in  his  work. 
Men,  as  a  rule,  work  with  a  will  only  when  the  pro- 
duct of  their  labor  is  to  be  their  own.  The  eye  of  the 
overseer  cannot  be  everywhere ;  and  even  if  it  could 
be,  it  is  a  very  poor  substitute  for  the  active  spur  of 
self-interest,  urging  the  worker  who  looks  to  his 
product  as  his  reward. 

The  adoption  of  "  piece-work,"  or  payment  accord- 
ing to  results,  acts  to  some  extent  as  a  corrective  of 


82  Political  Economy. 


this  evil.  But  this  plan  puts  the  workman  under  a 
strong  temptation  to  do  his  work  in  a  poor  and  hasty 
manner.  Except  in  the  few  industries  where  defects 
of  workmanship  are  readily  observed,  this  plan  is  un- 
suitable. Like  the  system  of  paying  by  the  day,  it 
depends  too  much  on  the  eye  of  the  manager.  The 
workman  has  no  personal  interest  in  the  goodness  and 
value  of  his  product,  nor  in  economizing  the  materials 
and  machinery  used  in  producing  it. 

Since  the  employer  owns  the  product  he  at  least  is 
interested  in  having  it  as  great  and  excellent  as  pos- 
sible. But  it  is  another  defect  of  the  wages  system 
that  even  the  employer's  interest  in  production  is  not 
of  the  simple  and  stimulating  kind  that-  sees  in  the 
product  a  reward  for  the  labor  of  producing  it.  For 
him  the  product  is  not  a  reward  of  labor,  but  a 
return  for  savings  paid  out  in  getting  it  made.  His 
motive  is  to  make  profit,  not  to  get  wealth  produced. 
Take  away  the  chance  to  make  profit,  and  he  will 
cease  to  carry  on  production. 

Now  the  employer's  chance  to  make  profit  depends, 
at  any  given  time,  on  the  price  at  which  he  can  sell 
the  product.  A  fall  of  the  price  may  cut  off  his 
profit  and  thus  leave  him  no  motive  for  going  for- 
ward. When  this  happens  production  comes  to  a  stand- 
still, unless  the  laborers  are  willing  to  work  for  less 
money.  As  they  commonly  are  not  willing  to  do  this, 
strikes  and  lockouts  follow,  —  with  resulting  loss  and 
bitterness  for  all  concerned.  These  disastrous  inter- 


Questions  and  Exercises.  83 

ruptions  of  industry,  instead  of  decreasing  with  the 
spread  of  education  among  the  masses,  seem  rather  to 
increase  in  number  and  intensity  as  time  goes  on.  No 
device  has  yet  been  discovered  for  preventing  them. 
They  are  an  evil  common  to  all  forms  of  wage-paying. 

It  will  be  convenient  to  defer  our  discussion  of 
wages  and  profits  until  we  have  considered  the  princi- 
ples governing  the  value  of  commodities  in  exchange. 

QUESTIONS    AND    EXERCISES. 

1.  How  do  you  show  that  the   business   of   merchants   is  to 
manage  the  exchange  of  products? 

2.  In  what  sense  is  it  true  that  all  wealth  is  useful?     Should 
you  give  the  name  of  wealth  to  rum?   to  quack  medicines?   to 
dime  novels? 

3.  Should  you  give  the  name  of  wealth  to  a  good  voice?  to  a 
talent  for  acting  on  the  stage?  to  great  physical  strength?    Why? 

4.  What  is  Natural  Wealth,  and   how  is  it  related  to  wealth 
produced  by  labor?     Give  examples  of  each  kind  of  wealth. 

5.  Show  that  increase  of  knowledge  tends  to  increase  natural 
wealth.     What  illustrations  can  you  give? 

6.  What  is  meant  by  Production  ?     Can  you  always  tell  by  the 
mere  name  of  a  thing  whether  it  is  a  product  of  labor  or  not? 
For  example :  if  you  were  asked  whether  a  tree,  or  a  flower,  or 
a  berry,  or  a  parrot  is  a  product  of  labor,  could  you  answer  with- 
out knowing  particulars  ?     How  as  to  books,  coats,  houses,  and 
pictures  ? 

7.  In  what  circumstances   does   any  kind   of   natural   wealth 
acquire  a  value  in  exchange  ?     Is  a  nation  enriched  by  the  fact  of 
its   natural  wealth   acquiring  an  exchange  value  ?     Suppose,  for 
example,  the  lands,  coal  mines,  etc.,  of  the  Unite.i  States  became 
twice  as  high  in  value  as  they  are  at  present,  would  this  of  itself 
add  anything  to  the  wealth  of  the  people? 


84  Political  Economy. 


8.  Is  it  possible  for  any  person  to  grow  richer  by  reason  of  the 
destruction  of  natural  wealth  ?    If  so,  what  is  the  precise  source 
of  his  gain  ? 

9.  Did    President   Lincoln's   proclamation   of  freedom  for  the 
slaves  make  any  class  of  persons  poorer  than  they  were  before? 
If  so,  did  it  diminish  the  wealth  of  the  United  States? 

10.  Why  does  land  differ  more  in  value  in  different  places  than 
cotton  cloth  does?     Do   you  see  any  reason   why  timber  should 
differ  more  widely  in  different  places  than  silk  ?     Any  reason  why 
green  vegetables  or  fresh  fish  should   differ  more  than  tea  or 
sugar  ? 

11.  Why  have  rivers  and  natural  harbors  no  exchange  value, 
whereas  canals  and  artificial  harbors  have  a  value  in  exchange? 
Would  it  be  true  to  say  that  streets  and  highways  have  exchange 
value,  as  streets  and  highways?     How  as  to  railways? 

12.  Are   mortgages    and    railroad    bonds  to  be    regarded    as 
wealth?     How  as  to  railroad  stocks?     When  a  man  buys  a  rail- 
road bond,  or  a  share  of  railroad  stock,  just  what  does  he  buy? 
Suppose  a  railroad  pays  no  dividends,  is  it  wealth?    Is  a  bank- 
note wealth? 

13.  Illustrate  by  example  in  your  own   neighborhood  the  dis- 
tinction between  Capital  and  other  wealth. 

14.  What  three  classes  of  things  constitute  the  capital  of  a 
community  ?     Give  examples  of  each  kind. 

15.  A  watchmaker's  stock  of  watches  are  part  of  his  capital: 
does  it  follow  that  all  watches  are  capital  ?     Is  there  any  kind  of 
wealth  that  can   never  be  capital?    Any  kind  that  is  always 
capital. 

16.  Explain   the   remark   that  "Capital  is  perpetually  under- 
going transformations." 

17.  If  you  were  asked  whether  paper  is  capital,  why  could  you 
give  no  definite  answer?     Should  you  have  the  same  difficulty  if 
the  question  were  asked  in  reference  to  coal  ?     Pig  iron  ?     Race- 
horses?    Printing  paper?     Mill  machinery  ?     Unimproved  lands  ? 


Questions  and  Exercises.  85 

Ploughs  ?     Turnip  seeds  ?     Could  you  answer  with  certainty  in 
any  of  these  cases  ?     Why  ? 

18.  What  circumstances  determine  the  productiveness  of  labor? 
Why  is  American  labor  more  productive  than  that  of  most  other 
countries  ? 

19.  Illustrate   the   distinction    between    Productive   and  Non- 
productive labor.      Mention  some  kinds  of'  labor  that  are  neither 
wholly  productive   nor  wholly  non-productive.     To   which   class 
should  you  assign   each  of  the  following  labors  :   nut-gathering; 
building  toy-boats;  making  fire-crackers;  fishing  for  sport;  exer- 
cising in  a  gymnasium  ;  playing  base  ball ;  the  study  of  music ; 
the  study  of  architecture ;  the  study  of  drawing ;  the  labor  of  a 
bank-teller ;    of  a  tailor's    apprentice ;   of  a  merchant ;   of  an  in- 
ventor; of  a  doctor ;  of  a  policeman ;  of  a  jailer?     Is  the  fact  that 
labor  is  paid  for  a  proof  that  it  is  productive  ? 

20.  In  what  ways  may  capital  be  created  ?     How  do  you  dis- 
tinguish between  Savings  and  Capital  ? 

21.  How   does   the   possession   of  some   capital  facilitate   the 
creation  of  more? 

22.  Why  are  the  Indian  tribes  of  the  West  usually  so  poor? 

23.  How  do  you  account  for  the  fact  that  comparatively  few 
men  own  capital  ? 

24.  Mention  the  chief  industrial  consequences  of  the  fact  that 
the  mass  of  producers  work  for  wages. 

25.  The  profits   made   by  hiring   laborers   can  be   accurately 
measured.     Can   the   gain   of  the   laborer   be   measured?     How 
should  you  express  the  laborer's  gain  from  being  hired? 

26.  Can  wages  change  without  any  change  in  the  amount  of 
money  the  laborers  receive? 

27.  Explain  the   remark  that  "The  more  a  nation  saves,  the 
more  it  can  produce."     Do  you  think  of  any  limit  to  the  increase 
of  production  through  increased  saving? 


CHAPTER    X. 

OF    VALUE    IN    EXCHANGE. 

1.    The    Distinction    between   Value    and    Price.  —  We 

must  now  consider  the  principles  governing  the  value 
of  commodities.  The  first  thing  to  be  done  is  to 
make  sure  that  we  see  clearly  what  is  meant  by  the 
value  of  an  article,  and  how  its  value  differs  from  the 
price  of  it.  The  price  of  a  thing  means  the  amount 
of  money  it  exchanges  for:  the  value  of  it  means  the 
amount  of  any  and  every  other  commodity  it  exchanges 
for. 

The  value  of  a  thing,  therefore,  includes  the  price 
of  it.  The  price  is  simply  one  example  or  instance  of 
its  value ;  the  instance  that,  by  frequent  use,  is  most 
familiar  and  expressive  to  us.  In  speaking  of  value 
we  compare  each  commodity  with  all  other  commodi- 
ties ;  in  speaking  of  price,  we  compare  it  with  the  one 
commodity,  money. 

Money  gives  us  a  convenient  and  ready  standard 
for  expressing  the  value  of  things.  For  all  practical 
purposes  men  naturally  prefer  to  speak  of  price  rather 
than  value.  Even  when  they  use  the  word  value, 
they  often  mean  only  the  price.  In  political  economy 
it  is  necessary  to  keep  in  mind  the  distinction,  and  to 


Value  in  Exchange.  87 


e  it  very  carefully.  For  example,  the  price  of 
a  thing  inn y  rise,  without  any  change  taking  place 
in  its  value :  the  price  of  every  other  thing  may  rise 
at  the  same  time,  if,  for  example,  all  prices  rise  ten 
per  cent.,  money  is  the  only  thing  whose  value  is 
affected:  the  value  of  money  is  lowered. 

All  prices  may  rise  or  fall  together,  but  it  is  impos- 
sible for  all  values  to  rise  or  fall  together.  If  some 
things  rise  in  value,  other  things  fall.  If  beef  rises  in 
value  as  compared  with  tea,  tea  falls  in  value  as  com- 
pared with  beef.  It  would  be  impossible  for  a  pound 
of  tea  to  become  worth  more  beef,  and  a  pound  of 
beef  to  become,  at  the  same  time,  worth  more  tea.  To 
speak  of  a  general  rise  or  a  general  fall  of  values  is 
to  use  a  contradiction  in  terms,  since  to  say  that  some 
things  have  risen  in  value  is  the  same  as  saying  that 
other  things  have  fallen  in  value.  In  other  words, 
value  is  purely  a  matter  of  comparison ;  there  is  no 
absolute  standard  for  measuring  it.  We  simply  compare 
one  commodity  with  {mother.  As  all  the  runners  in  a 
race  cannot  simultaneously  gain  on  each  other,  so  all 
commodities  cannot  simultaneously  rise  or  fall  in  value. 

We  shall  find  that  the  price  of  every  commodity  is 
subject  to  two  very  different  kinds  of  change.  In  the 
first  place,  it  may  rise  or  fall  without  a  corresponding 
rise  or  fall  in  the  prices  of  other  things.  In  this  case 
the  value  of  the  commodity  is  affected.  It  becomes 
worth  more  or  less  of  other  commodities  than  it  was 
worth  before. 


88  Political  Economy. 


In  the  second  place,  all  prices  may  change  together, 
and  equally;  that  is  to  say,  the  exchange  value  of 
money  may  rise  or  fall.  In  this  case,  leaving  money 
out  of  the  account,  the  exchange  value  of  other  things, 
compared  among  themselves,  remains  unaltered.  The 
difference  between  the  two  cases  is  highly  important. 

Since  a  change  in  the  price  of  an  article  may  or 
may  not  imply  a  change  in  its  value,  it  would  be 
safest  always  to  speak  of  value,  rather  than  price. 
But  we  can  hardly  avoid  speaking  of  prices.  When- 
ever, in  the  following  pages,  a  rise  or  fall  of  price  is 
spoken  of,  it  is  to  be  understood  as  a  rise  or  fall  con- 
fined to  the  commodity  named :  implying  therefore  a 
corresponding  change  in  the  value  of  the  commodity. 

2.  Exchange  Value  and  Intrinsic  Value.  —  It  is  neces- 
sary also  to  guard  against  confounding  the  value  of 
which  we  speak  in  political  economy  with  the  intrinsic 
value  or  usefulness  of  things.  The  value  of  which  we 
speak  here  relates  simply  to  buying  and  selling.  The 
full  name  for  it  is  value  in  exchange. 

It  is  true,  of  course,  that  nothing  can  have  Value  in 
exchange  unless  some  persons  consider  it  a  good  thing 
to  have.  Things  that  have  no  intrinsic  value  for  any- 
body have  no  exchange  value  either.  But,  beyond 
this,  there  is  no  connection  between  the  exchange 
value  of  commodities  and  their  intrinsic  utility.  I 
suppose  we  should  all  agree  that  bread  is  intrinsically 
more  useful  than  diamonds;  yet  one  little  diamond 
has  more  exchange  value  than  many  tons  of  bread. 


Value  in  Exchange.  89 

If  the  world  should  be  overtaken  by  a  famine,  the 
exchange  value  of  bread  and  diamonds  would  be 
changed.  In  either  case,  the  value  of  the  bread  or  of 
the  diamond  is  the  amount  of  other  things  to  be  got 
in  exchange  for  it. 

3.  Value  depends  immediately  on  Demand  and  Supply. — 
We  are  all  aware  that  when  the  supply  of  a  commod- 
ity coming  forward  for  sale  falls  short  of  the  demand 
for  it,  the  price  is  usually  raise*.].  Those  who  have  it 
for  sale  find  that  they  can  charge  more  for  it  than 
before,  and  yet  dispose  of  their  whole  stock.  Since 
business  men  are  on  the  alert  to  make  all  they  can, 
they  ordinarily  raise  the  price  at  once.  Even  if  for 
any  reason  they  tail  to  do  this,  the  stock  will  pres- 
ently become  exhausted,  and  the  buyers,  eager  to  get 
more,  will  offer  a  higher  price  for  it. 

On  the  other  hand,  when  the  salable  supply  of  a 
commodity  exceeds  the  demand  for  it  at  the  existing 
price,  those  who  have  it  for  sale  find  themselves 
obliged  to  lower  the  price  in  order  to  tempt  people 
to  buy  more  of  it.  If  they  fail  to  do  this  a  portion 
of  the  supply  will  remain  unsold  on  their  hands  and 
they  may  lose  more  thereby  than  they  would  lose  by 
lowering  the  price. 

Thus  much  we  could  safely  say,  even  if  all  sellers 
worked  in  perfect  harmony  and  strict  combination 
with  each  other.  But  it  is  extremely  rare  that  -all; 
sellers  act  in  harmony,  —  they  are  usually  more  or  less 
in  the  attitude  of  rivals.  Each  acts  for  himself;  and 


90  Political  Economy. 


when  it  becomes  clear  that  the  commodity  is  not  sell- 
ing as  fast  as  it  is  produced,  some  dealer  is  pretty 
certain  to  offer  his  stock  at  a  lower  price  than  before. 
In  such  a  case,  the  action  of  one  dealer  is  usually 
followed  by  others,  and  finally  by  all.  Any  dealer 
who  declines  to  follow,  does  so  at  the  risk  of  selling 
little  or  none  of  his  stock.  We  have  in  this  a  case  of 
the  competition  of  sellers. 

4.  Equilibrium  of  Supply  and  Demand.  —  The  natural 
aim  of  trade  is  to  make  exchange  keep  pace  with 
production,  —  to  sell  things  as  rapidly  as  they  are 
produced. 

When  people  buy  any  commodity  faster  than  it 
comes  forward  from  the  producers,  the  price  is  raised. 
The  rise  of  price  causes  people  to  buy  less  of  it.  The 
price  goes  on  rising  until  the  demand  is  brought  to  a 
rough  equality  with  the  daily  production. 

In  the  reverse  case,  when  a  commodity  does  not 
sell  as  fast  as  it  is  produced,  the  price  is  lowered  in 
order  to  tempt  people  to  buy  more  of  it.  The  price 
goes  on  falling  until  the  purchases  of  consumers  come 
to  be  roughly  equal  to  the  daily  production. 

Thus  the  value  of  everything  tends  to  be  such  as  to 
make  the  demand  equal  to  the  supply.  But  changes 
of  value  react  on  the  supply  of  things  as  well  as  on 
the  demand  for  them.  On  the  side  of  supply  we  come 
to  the  source  of  commodities,  namely,  production. 

When  the  value  of  a  commodity  rises,  the  production 
of  it  becomes  more  profitable  than  before.  Those  who 


Value  in  Exchange.  91 

produce  it  are  stimulated  to  produce  more  of  it ;  new 
laborers  are  called  in,  more  capital  is  devoted  to  the 
work,  and  the  production  is  increased. 

On  the  other  hand,  when  the  value  of  a  thing  falls, 
those  who  produce  it  find  their  industry  less  profitable. 
This  will  tend  to  make  them  produce  less  of  it. 

But  the  process  of  increasing  or  diminishing  the  pro- 
duction of  most  commodities  is  necessarily  somewhat 
slow.  Production,  as  we  have  already  seen,  requires 
time,  especially  where  much  machinery  is  needed,  or 
long  processes  of  growth  and  manufacture  have  to  be 
waited  for.  Again,  once  men  have  engaged  in  pro- 
ducing a  given  commodity,  it  is  not  easy  for  them  to 
withdraw  from  it.  Even  a  temporary  stoppage  implies 
great  inconvenience  and  loss  both  to  employers  and 
laborers.  Men  usually  abandon  an  industry  only  when 
they  are  forced  to  do  so. 

It  follows  that  the  rough  equality  between  supply 
and  demand  is  maintained,  from  day  to  day,  rather  by 
affecting  the  demand  through  changes  of  value  than 
by  affecting  the  supply  through  changes  of  production. 
A  high  or  low  value  acts  at  once  on  the  demand, 
checking  or  stimulating  it  into  equality  with  the 
existing  supply,  until  production  can  adjust  itself  to 
the  situation. 

The  connection  between  value  and  production  will  be 
considered  more  fully  in  the  next  chapter. 


CHAPTEE  XL 

COST  OP  PRODUCTION  AS  THE  ULTIMATE  REGULATOR 
OF  VALUE. 

1.  Cost  of  Production  to  the  Employer,  or  Money  Cost.  — 
There  are  two  ways  of  looking  at  cost  of  production. 
We  may,  in  the  first  place,  regard  the  matter  wholly 
from  the  stand-point  of  employers  of  labor.  For  them 
the  cost  of  producing  a  commodity  is  the  amount  they 
pay  out  for  materials,  machinery,  etc.,  and  in  wages  to 
their  laborers.  This  is  a  natural  and  convenient  view 
of  cost  of  production  as  a  matter  of  practical  business. 
It  is,  in  fact,  the  only  view  that  could  find  expression  in 
book-keeping.  It  gives  the  employer  a  basis  for  reckon- 
ing how  much  he  gains  by  selling  his  product  at  any 
given  price.  The  question  of  cost  for  him  has  refer- 
ence only  to  his  profits.  Of  course,  the  more  cheaply 
he  can  get  the  requisites  of  production,  including  pro- 
ductive labor,  the  greater  his  profits  will  be. 

But  in  several  ways  this  view  is  inadequate  for 
scientific  uses.  First,  it  is  too  narrow,  since  it  applies 
only  to  production  carried  on  by  hired  labor.  It  gives 
us  no  definition  for  the  cost  of  production  where  those 
who  do  the  labor  provide  the  capital  too,  —  as  is  the 
case,  for  example,  with  many  hunters,  fishermen, 
92 


Cost  of  Production  the  Regulator  of  Value.        93 

tailors,  shoemakers,  small  farmers,  and  others.  In 
fact,  it  relates  not  to  production  in  and  of  itself,  but 
to  the  terms  on  which  some  men  can  hire  other  men 
to  labor  for  them  in  producing  things.  It  views  the 
hired  laborer  as  a  productive  machine  whose  services 
cost  men  something,  rather  than  as  himself  a  man 
equally  interested  with  the  employer  in  getting  com- 
modities produced  at  a  low  cost.  The  true  cost  to 
men  of  producing  the  things  they  need  must  be  the 
same,  whether  some  work  as  hired  laborers  for  others, 
or  all  work  for  themselves.  We  therefore  need  a 
broader  definition  that  shall  not  view  production  solely 
as  an  opportunity  for  employers  to  make  profit. 

Secondly,  even  where  production  is  carried  on  by 
hired  laborers,  this  view  of  cost  of  production  exposes 
those  who  adopt  it  to  Very  serious  errors  and  miscon- 
ceptions. The  payments  an  employer  has  to  make  in 
getting  an  article  produced  are  liable  to  change  for 
reasons  that  have  no  real  connection  with  the  produc- 
tion of  the  article.  For  example,  four  hundred  years 
ago  an  employer's  accounts  showed  very  much  smaller 
payments  for  wages  and  other  things  than  they  do  at 
present.  Men  could  be  hired  for  from  ten  to  fifteen 
cents  a  day;  wheat  could  be  bought  for  eighteen  cents 
a  bushel ;  beef  for  less  than  a  cent  a  pound ;  butter 
for  a  cent;  and  other  things  in  proportion.1  In  those 
days  money  had  ten  or  twelve  times  more  value  than 
it  has  now.  If,  therefore,  we  should  hold  the  view 
1  Thorold  Rogers,  Work  and  Wages,  p.  539. 


94  Political  Economy. 

that  the  cost  of  production  of  things  is  measured  by 
the  money  payments  of  employers,  we  should  have  to 
say  that  it  is  greater  now  than  it  was  four  hundred 
years  ago :  the  fact  being  that  inventions  have  very 
much  lessened  it. 

Those  who  compare  the  cost  of  producing  things 
in  different  countries  at  the  present  time,  using  the 
money  payments  of  employers  as  a  basis  of  compari- 
son, are  liable  to  the  same  error.  The  value  of  money 
differs  very  considerably  in  different  countries  and 
even  in  different  parts  of  the  same  country.  This  is 
especially  true  in  the  case  of  countries  and  regions 
between  which  trade  is  impeded  or  prevented.  For 
example,  in  the  early  days  of  gold  mining  in  Califor- 
nia, before  facilities  existed  for  trade  with  other  parts, 
money  had  a  much  lower  value  than  it  had  in  the 
rest  of  the  country. 

2.  True  Cost  of  Production.  —  We  need  a  broader 
and  truer  definition  of  cost  of  production  than  the  one 
just  considered,  a  definition  that  shall  apply  to  all 
production  under  whatever  conditions  carried  on,  and 
shall  be  free  from  liability  to  error  on  account  of 
fluctuations  in  the  value  of  money. 

Such  a  definition  we  gain  by  looking  simply  at 
production  itself,  rather  than  at  the  accidental  and 
more  or  less  artificial  arrangements  made  between 
men  in  regard  to  it.  It  is  no  necessary  feature  of 
production  that  a  few  men  should  own  the  capital  and 
should  hire  the  rest  with  a  view  to  making  profit 


Cost  of  Production  the  Regulator  of   Value.        95 

It  is,  however,  necessary  that  men  should  labor;  and 
it  is  equally  necessary,  owing  to  the  nature  of  produc- 
tion, that  most  of  the  labor  needed  for  producing  enjoy^ 
able  commodities,  should  be  expended  long  in  advance 
of  receiving  them  as  its  reward. 

These  two  sacrifices  of  our  ease  and  present  enjoy- 
ment, first  the  burden  of  labor  and  then  the  burden 
of  waiting  for  our  reward,  are  demanded  by  the  very 
nature  of  production,  and  constitute  for  men  the  true 
cost  of  everything  they  produce.  Men  who,  having 
the  requisite  knowledge  and  natural  wealth,  are  able 
and  willing  to  labor  and  to  wait  for  the  reward,  are 
in  a  position  to  produce  for  themselves  whatever  it  is 
possible  for  men  to  produce.  We  may  therefore  define 
the  cost  of  production  of  every  commodity  as  the 
quantity  of  labor  and  the  amount  of  waiting  necessary 
in  order  to  produce  it.  (See  Appendix,  page  387.) 

This  definition  applies  equally  well  whether  those 
who  perform  the  labor  receive  wages  or  wait  for  the 
natural  reward  of  their  labor ;  if  they  receive  wages, 
then  the  burden  of  waiting  is  assumed  by  another.  It 
also  avoids  all  danger  of  error  on  account  of  changes 
in  the  value  of  money. 

As  thus  defined,  cost  of  production  is  affected'  only 
by  changes  that  appear  in  the  act  of  production 
itself,  —  changes  that  make  the  production  easier  or 
harder  than  it  was  before.  Inventions  that  lessen  the 
necessary  labor,  and  the  discovery  of  new  and  more 
fruitful  sources  of  materials,  lessen  the  cost  of  produc- 


96  Political  Economy. 

tion.  On  the  other  hand,  if  the  best  and  most  con- 
venient sources  of  materials  should  become  exhausted, 
the  cost  of  production  would  be  increased. 

But  changes  of  wages  have  no  effect  on  cost  of 
production  as  here  defined.  The  labor  and  the  waiting 
required  to  produce  any  article  are  the  same  when 
wages  are  high  as  when  wages  are  low.  Changes  of 
wages,  as  we  shall  see  presently,  affect  only  the  profits 
of  employers. 

Again,  according  to  this  definition  the  exertions  of 
the  employer  himself  are  part  of  the  cost  of  produc- 
tion, since  the  labor  of  planning  and  directing  the 
work  is  a  necessary  part  of  the  labor  of  producing 
things.  The  view  that  finds  the  cost  of  production 
in  the  employer's  payments,  makes  no  account  of  this: 
it  ignores  the  employer's  own  share  in  production. 

Since,  however,  the  business  man's  view  of  the  cost 
of  production  is  not  likely  to  be  abandoned,  we  may 
distinguish  the  two  definitions  by  calling  the  first,  Em- 
ployer's Cost  or  Money  Cost,  and  the  other,  Economic 
Cost  or  Eeal  Cost.  In  this  way  we  may  hope  to  avoid 
misunderstandings.  The  two,  as  we  shall  see  more  fully 
later,  relate  to  very  different  things. 

3.  Labor  as  an  Element  in  the  Cost  of  Production! — 
The  chief  element  in  the  cost  of  production  is  labor. 
We  include,  in  each  case,  all  the  labor,  whether  of 
hand  or  head,  which  contributes  in  any  way  to  the 
production  of  the  commodity.  The  mental  labor  of 
planning  the  work  and  of  directing  and  overseeing  the 


Cost  of  Production  the  Regulator  of  Value.        97 

workmen,  is  part  of  the  cost  of  production  as  well  as 
the  exertions  of  the  workmen  themselves. 

It  is  to  be  remembered  that  the  labor  of  producing 
an  article  includes  all  the  labor  from  the  beginning, 
not  merely  the  last  stage  of  the  work.  For  example, 
the  labor  of  making  cotton  cloth  includes  the  labor 
spent  in  raising  and  transporting  the  raw  cotton,  as 
well  as  that  spent  in  making  it  up  into  cloth  at  the 
mills.  Also,  it  includes  the  labor  of  producing  all  the 
secondary  materials  needed  in  the  production,  such 
as,  in  the  case  of  cotton  cloth,  starch,  dyes,  chemicals, 
fuel,  etc. 

In  the  industries  requiring  skill  or  training,  the 
labor  of  acquiring  this  skill  is  also  included  in  the 
cost  of  production. 

The  labor  of  producing  a  commodity  also  includes, 
the  labor  of  making  the  requisite  tools,  machinery,  and 
appliances  of  all  kinds  for  carrying  on  the  work. 

But  here  we  must  remember  that  the  machinery, 
buildings,  etc.,  are  not  used  up  in  producing  a  single 
specimen  of  the  commodity.  The  labor  of  making  the 
machinery  must  be  regarded  as  belonging,  in  part,  to 
every  specimen  it  helps  to  produce  until  it  is  worn 
out.  Thus,  if  a  sewing-machine  stitches  ten  thousand 
shirts  before  it  wears  out,  only  one-ten-thousandth 
part  of  the  labor  of  making  it  is  chargeable  to  each 
shirt.  In  the  same  way,  in  the  case '  of  all  other 
apparatus  of  production  and  exchange,  only  a  pro- 
portional part  of  the  labor  of  making  it  belongs  to 


Political    Economy. 


the  cost  of  production  of  any  given  quantity  of  each 
commodity. 

4.  How  Labor  is  Measured.  —  The  term  "quantity  of 
labor,"  as  used  in  denning  cost  of  production,  needs 
some  explanation.  The  quantity  of  labor  required  for 
producing  a  commodity  is  not  measured  simply  by 
days  or  hours,  though  the  length  of  time  occupied 
must  always  be  the  chief  factor  in  the  case.  We 
must  include,  with  the  length  of  time,  every  other 
feature  of  the  work  that  tends  to  attract  or  to  repel 
producers. 

A  day's  labor  in  an  industry  that  is  disagreeable, 
or  dangerous,  or  exhausting  for  those  engaged  in  it, 
is  a  greater  quantity  of  labor  than  a  day's  work  in  a 
pleasant,  safe,  and  easy  occupation.  The  standard, 
however,  for  judging  the  character  of  different  occu- 
pations in  these  respects,  is  the  opinion  and  behavior 
of  the  laborers  concerned,  —  which  may  or  may  not 
be  entirely  in  harmony  with  the  actual  facts.  What 
they  think  hard  or  dangerous  or  disagreeable  is,  for 
our  present  purpose,  hard  or  dangerous  or  disagree- 
able; what  they  think  easy  and  pleasant  is  easy  and 
pleasant. 

The  product  of  an  industry  that  the  laborers  are 
reluctant  to  enter  must  have  a  higher  value  than  a 
product  made  in  the  same  length  of  time  in  an  in- 
industry  which  they  regard  as  attractive,  —  enough 
higher  to  correspond  with  the  greater  sacrifice  made 
by  the  laborers  who  engage  in  the  distasteful  industry. 


Cost  of  Production  the  Regulator  of  Value.        99 

If,  for  example,  workmen  think  two  days'  labor  in  a 
coal-pit  as  great  a  sacrifice  as  three  days'  labor  in  the 
fields  or  in  the  forest,  then  so  far  as  cost  of  produc- 
tion is  concerned,  two  days'  work  in  a  coal-pit  is  as 
great  a  quantity  of  labor  as  three  days'  labor  in  the 
fields  or  in  the  woods.  In  such  a  case,  other  things 
being  equal,  the  coal  produced  by  two  days'  labor  will 
ordinarily  have  the  same  value  as  the  amount  of 
wheat  or  of  lumber  produced  by  three  days'  labor. 

5.  Of  Waiting  as  an  Element  in  Cost  of  Production.— 
I  have  said  that  labor  is  the  chief  element  in  the  cost 
of  production.  But  since  labor  does  not  result  at  once 
in  a  commodity  good  for  human  use,  and  since  it  is 
burdensome  to  wait  for  good  things  after  we  have 
labored  to  get  them,  this  necessity  of  waiting  must 
be  included  in  each  case  as  part  of  the  cost.  It  is 
a  sacrifice  as  real  as  the  labor  itself,  though  of  a 
different  kind. 

The  period  of  necessary  waiting  differs  much,  as 
we  have  already  seen,  in  different  industries.  For 
example,  a  quarter  of.  beef  and  a  load  of  building 
stones  may  have  cost  the  same  amount  of  labor;  but 
their  values  are  not  for  that  reason  the  same.  The 
labor  that  produced  the  building  stone  may  have 
been  for  the  most  part  quite  recent;  whereas,  by  the 
necessity  of  the  case,  the  labor  of  raising  the  beef 
must  have  been  spread  over  several  years.  The  labor 
spent  in  the  early  stages  of  producing  the  beef  has 
to  go  long  without  its  natural  reward.  Therefore,  the 


100  Political    Economy. 

beef,  when  at  last  it  is  ready  for  use,  must  have 
a  value  enough  higher  than  that  of  the  stones  to 
reward  this  longer  waiting.  Otherwise  men  would 
avoid  industries,  such  as  the  raising  of  beef,  in  which 
long  waiting  is  necessary,  and  would  nock  into  those 
occupations  that  yield  their  products  most  quickly. 

The  waiting  element  in  cost  of  production  is  con- 
nected, as  we  see  at  once,  with  the  capital  used. 
Capital  at  any  moment  represents  the  labor  put  into 
production  without  receiving,  as  yet,  any  enjoyable 
return.  Somebody  is,  of  course,  entitled  to  receive 
Nature's  reward  for  that  labor  in  the  future.  The 
man  who  actually  performed  the  labor  may  have  been 
relieved  of  the  waiting,  may  have  parted  with  his 
right  to  the  future  reward  by  receiving  wages  in- 
stead of  it;  but  this  only  transfers  the  burden  of  the 
waiting  to  another.  Capital  always  implies  a  deferred 
reward  for  labor. 

A  large  part  of  capital  consists  of  machinery.  The 
natural  reward  of  the  labor  spent  in  making  machinery, 
comes  by  small  installments,  day  by  day,  in  the  enjoy- 
able products  the  machinery  helps  to  produce.  The 
sustained  waiting  for  these  products  to  appear  con- 
stitutes a  substantial  part  of  the  cost  of  producing 
them.  When  machinery  is  introduced  into  an  in- 
dustry previously  carried  on  by  hand,  the  cost  of 
production  is  not  lessened  to  the  same  extent  as  the 
quantity  of  labor  is  lessened.  The  making  of  the 
machinery  involves  new  waiting,  since  the  natural 


Cost  of  Production  the  Regulator  of  Value.      101 

reward  of  the  labor  that  makes  it  will  be  very  slow 
in  coming.  If  the  new  mode  of  production  should 
give  us  the  commodity  for  half  the  old  quantity  of 
labor  (counting  in  the  labor  of  making  the  machinery), 
the  value  of  the  commodity  would  not  fall  to  half  of 
the  old  value.  If  it  did,  there  would  be  nothing  to 
reward  the  new  waiting  for  the  reward  of  the  labor 
that  makes  the  machinery.  On  these  terms  no  man 
would  devote  labor  to  the  making  of  machines. 

How  much  the  value  of  a  commodity  that  requires 
long  waiting  shall  exceed  the  value  of  one  made  by 
the  same  amount  of  labor  but  with  less  waiting, 
depends  mainly  on  the  character  of  the  people  who 
have  to  be  looked  to  for  the  capital  needed  in  pro- 
duction. If  these  regard  waiting  as  a  great  sacrifice, 
the  value  of  things  requiring  long  waiting  will  be 
high  in  comparison  with  things  requiring  little  wait- 
ing,—  the  amount  of  labor  being  the  same  in  both. 
If,  on  the  other  hand,  they  regard  waiting  as  a  slight 
sacrifice,  then  the  waiting  element  in  cost  of  produc- 
tion will  count  for  comparatively  little  in  determining 
value. l 

In  other  words,  there  is  no  standard  for  measuring 
how  great  a  sacrifice  waiting  is  in  itself;  we  can  only 
take  the  judgment  of  those  who  submit  to  it.  Their 
opinion  regarding  it  is  roughly  indicated  by  the  average 

1  It  follows  that,  as  a  community  becomes  more  willing  to  make 
the  sacrifice  of  waiting,  those  products  which  demand  longest  waiting 
decline  in  exchange  value. 


102  Political    Economy. 

rate  of  interest  on  loans.  In  a  country  where  the 
people  readily  submit  to  waiting,  the  rate  of  interest 
is  usually  low ;  whereas  in  countries  where  waiting  is 
regarded  as  more  burdensome,  the  rate  of  interest  is 
usually  high. 

6,  Cost  of  Production  is  made  up  of  many  small  parts.  — 
If  now  we  should  try  to  analyze  the  cost  of  produc- 
tion of  any  commodity,  we  should  find  it  to  consist 
of  many  small  bits  of  labor,  each  followed  by  its 
own  period  of  waiting.  The  number  of  persons  who 
contribute,  in  one  way  or  another,  to  the  work 
of  producing  and  exchanging  even  the  simplest  com- 
modity, is  surprisingly  large.  The  production  of  a 
book  is  probably  not  more  complicated  than  that  of 
most  other  commodities ;  yet  if  I  were  to  begin  here 
a  full  account  of  all  the  separate  contributions  made 
by  different  persons  to  the  production  of  this  little 
book,  I  think  the  book  itself  would  hardly  contain 
the  list  of  them. 

Let  us  look  for  a  moment  at  the  cost  of  producing 
the  paper  on  which  it  is  printed. 

The  cost  of  manufacturing  the  best  printing-paper, 
and  of  transporting  it  to  the  place  of  use,  is  made  up 
of  the  items  given  in  the  following  list:  The  figures 
are  for  a  quantity  costing  $  10,000,  and  are  taken  from 
the  actual  accounts  of  a  New  England  paper-mill  for  the 
year  1887.  They  represent,  of  course,  what  we  have 
called  the  Employer's,  or  Money,  Cost,  since  this  is  all 
that  the  manufacturer's  books  are  concerned  with. 


Cost  of  Production  the  Regulator  of  Value.       103 


Buildings1 $200 

Machinery  i 516 

Fuel 360 

Wood  Fibre 3,753 

Cotton  Rags 1,388 

Linen      "       142 

Papers 158 

Soda  Ash  .  11 


Alum  .  .  . 
Clay.  .  .  . 
Lime  .  .  . 
Rosin  .  .  . 
Oil  of  Vitriol 


49 
125 

75 
6 
2 


Colors 14 

Starch    .  88 


Bleach $103 

Lubricating  Oil      ....  21 

Lights 17 

Lumber 91 

Wrappers  .    . 64 

Marline 73 

Freight  and  Cartage  ...  562 

Horse  and  Carriage    ...  24 

Sundries 48 

Insurance2 90 

Taxes2 46 

Wages  (including  manager's 

salary) 1,974 


TOTAL $10,000 


It  may  seem  at  first  sight  that  only  about  a  fifth  of 
the  whole  money  cost  of  manufacturing  paper  consists 
of  wages.  But  a  little  study  of  the  matter  enables  us 
to  see  that  the  sums  paid  for  machinery,  materials,  etc. 
are  in  fact  mainly  payments  of  wages  in  disguise.  These 
sums  replace  (with  a  profit)  to  other  employers  the 
wages  paid  for  the  production  of  the  machinery,  ma- 
terials, etc.  In  this  respect  the  division  of  labor  among 
employers  makes  no  difference;  in  the  end  it  is  as  if 
one  employer  carried  on  the  whole  business.  As  the 
true  cost  of  production  is  always,  at  bottom,  made  up 

1  Of  course  these  figures  represent  not  the  total  cost  of  the  build- 
ings and  machinery,  but  the  proportion  of  that  cost  assignable  to  the 
given  quantity  of  paper.    (See  p.  91.)    The  buildings  and  machinery 
are  in  fact  worth  many  thousands  of  dollars. 

2  In  regard  to  insurance  as  an  element  in  cost  of  production,  see 
the  note  on  "  Risk  "  at  the  end  of  this  chapter.    Taxes  are  strictly  not 
a  part  of  the  cost  of  production  ;  they  are  rather  to  be  regarded  as  a 
portion  of  the  product  taken  by  the  government  for  public  purposes. 


104  Political    Economy. 


of  labor  and  waiting,  so  the  employer's  cost  is  always 
at  bottom  made  up  of  payments  for  labor  and  waiting. 

If  now  we  should  attempt  to  analyze  the  cost  of 
production  of  any  commodity  into  all  the  parts  or  par- 
ticles of  which  it  is  composed,  the  task  would  prove 
to  be  very  long.  Whatever  is  used  in  the  production 
of  the  buildings  or  the  machinery,  or  the  wood-fibre 
or  the  alum  or  anything  else  named  in  the  above  list, 
is  in  fact  used  in  the  production  of  paper.  Its  cost  of 
production  is  therefore  part  of  the  cost  of  producing 
paper.  In  analyzing  the  cost  of  production  of  paper 
we  should  have  to  analyze  the  cost  of  each  of  these, — 
which  would  give  us  for  each  of  them  a  list  of  items 
about  as  long  as  that  given  above  for  the  paper  itself. 
Again,  each  article  named  in  these  new  lists,  would 
have  a  cost  of  production  needing,  in  turn,  to  be  simi- 
larly resolved  into  its  parts;  which  would  give  a  new 
and  very  numerous  set  of  items ;  and  so  on  until  we 
should  bring  in  every  article  that  comes  into  play, 
directly  or  indirectly,  in  the  production  of  paper.  We 
should  find,  in  this  way,  that  the  labor  of  making 
paper  is  resolvable  into  many  hundreds,  perhaps  thou- 
sands, of  parts;  some  of  them  perhaps  too  small  to  be 
stated,  but  all  of  them  necessary  to  the  final  result. 
The  sum  of  all  these  labors,  together  with  the  aggregate 
of  all  corresponding  periods  of  waiting  for  reward,  con- 
stitute the  true  or  economic  cost  of  production. 

This  reminds  us  of  the  wonderful  extent  to  which 
civilized  men  have  carried  division  of  labor.  The  in- 


Cost  of  Production  the  Regulator  of  Value.      105 

dus tries  of  a  nation  are  closely  interwoven  with  each 
other,  forming  in  reality  one  great  system  of  co-opera- 
tion. Each  producer  depends  on  the  help  of  thousands 
of  others,  whom  he  has  never  seen.  The  situation, 
along  with  the  great  advantages  it  brings,  obviously 
imposes  a  grave  duty  on  all  concerned.  Any  interrup- 
tion or  disturbance  at  any  part  of  the  system  is  certain 
to  work  injury  for  the  whole  body  of  producers. 

7.  Market  Value  tends  to  Conform  to  Natural  Value,  — 
The  Natural  Value  of  every  commodity  is  that  which  cor- 
responds to  the  cost  of  producing  it.  Things  exchange 
for  each  other  at  their  natural  value  when  for  a  given 
quantity  of  any  particular  commodity,  the  seller  can  ob- 
tain as  much  of  every  other  commodity  as  is  produced 
by  the  same  quantity,  or  equivalent  quantities,  of  labor 
and  waiting.  Thus  the  law  of  natural  value  is  simply 
the  just  rule  of  equal  rewards  for  equal  sacrifices. 

This  is,  however,  a  rather  ideal  standard  to  which 
the  actual  values  of  things  at  any  given  moment 
seldom  or  never  exactly  correspond.  The  actual  or 
market  value  of  every  commodity  is  acted  on,  as  we 
know,  by  every  change  of  demand  or  of  supply.  These 
disturbances  are  temporary  in  their  effects,  but  they  are 
constantly  occurring.  The  result  is  that  the  market 
value  of  every  commodity  is  commonly  somewhat  above 
or  below  its  natural  value. 

But  we  can  safely  say  that,  except  in  special  cases 
to  be  spoken  of  in  a  later  chapter,  when  the  market 
value  of  any  commodity  is  above  or  below  its  natural 


106  Political    Economy. 

value,  the  rule  of  equal  rewards  for  equal  sacrifices  will 
tend  to  bring  it  back  to  that  level.  When  the  business 
of  producing  any  commodity  is  more  profitable  than  the 
production  of  other  things,  new  labor  and  capital  will  be 
attracted  into  producing  it,  and  the  resulting  increase 
of  supply  will  cause  the  market  value  to  fall ;  when 
it  is  less  profitable,  the  reverse  will  happen. 

We  now  sec  how,  under  division  of  labor,  each  man 
knows  what  to  produce  and  what  to  avoid  producing, 
though  he  has  never  seen  the  persons  who  are  to  use 
his  product.  These  changes  of  value  are  messages  of  a 
very  effective  sort  from  the  consumers,  telling  when 
too  much  or  too  little  of  any  article  is  produced.  With- 
out them,  production  by  division  of  labor  would  be 
reduced  to  hopeless  guessing. 

8.  Improvements  in  Production.  —  It  is  important  in 
considering  the  effect  of  improvements,  to  bear  in  mind 
that  it  is  the  comparative,  not  the  absolute,  cost  of  pro- 
duction that  governs  the  values  of  things.  If  by  a 
universal  improvement  we  could  lessen  by  one-half  the 
cost  of  production  of  all  things,  the  value  of  every  com- 
modity would  remain  unchanged.  The  ratio  of  the  cost 
of  each  to  that  of  every  other  would  be  the  same  as 
before,  and  it  is  obviously  on  this  alone  that  values 
depend,  since  value  is  simply  a  comparison. 

The  only  effect  of  a  general  and  equal  cheapening  of 
all  things  would  be  to  increase  the  rewards  of  labor  and 
waiting.  Wages  and  profits  would  be  higher.  Things 
would  be  cheaper  in  the  sense  of  getting  more  of  them 


Cost  of  Production  the  Regulator  of  Value.      107 

for  our  work,  but  not  in  the  sense  of  getting  more  of 
one  commodity  for  another. 

Improvements  do  always,  in  practice,  affect  values 
when  they  are  introduced,  because  no  invention  is  uni- 
versally applicable.  Coming  as  they  do,  in  single  in- 
dustries, they  have  the  effect  of  lowering  the  values 
of  the  commodities  whose  production  they  make  easier 
than  it  was  before.  It  is  to  be  observed  that  they 
also  increase  the  rewards  of  all  producers  who  use  the 
cheapened  articles.  The  fall  of  value  is  obviously  the 
process  by  which  improvements  in  single  industries 
extend  their  benefits  to  the  whole  community.  Every 
improvement  that  lessens  the  labor  of  producing  any 
article  in  general  use,  adds  to  the  general  prosperity. 

Since,  in  the  long  run,  improvements  are  made  to  some 
extent  in  every  industry,  it  follows  that  to  some  extent 
the  effect  of  improvements  in  the  long  run,  is  rather  to 
raise  wages  and  profits  than  to  lower  the  values  or  prices 
of  commodities.  Perhaps  a  better  way  to  express  it  is  to 
say  that,  in  the  long  run,  improvements  raise  wages  and 
profits  without  lowering  values  or  prices. 

It  used  to  be  thought  necessary  to  show  in  politico  I 
economy,  that  labor-saving  improvements  are  not  injuri- 
ous to  the  laborers.  There  was  formerly  among  the 
laborers  of  the  old  world  a  strong  dislike  of  machinery, 
on  the  ground  that  it  took  the  place  of  men,  and  de- 
prived laborers  of  the  opportunity  to  earn  wages.  There 
is  no  doubt  that,  temporarily,  the  introduction  of  ma- 
chinery on  a  large  scale  may  give  rise  to  hardships 


108  Political    Economy. 

until  things  adjust  themselves  to  the  new  situation. 
But  when  necessary  changes  are  made,  every  labor- 
saving  contrivance  is  a  benefit  to  the  community. 
The  displaced  laborers  soon  find  other  employment, 
and  the  community  as  a  whole  has  a  greater  return  for 
its  labor  than  it  had  before.  I  think  that  in  America 
machinery  needs  no  defence. 

Of  Risk  in  Production.— It  is  usual  to  name  risk  as  an  element  in 
cost  of  production,  but  it  does  not  seem  to  me  that  risk  is  an 
element  distinct  in  kind  from  the  necessary  labor  and  waiting. 
Personal  risks  to  health,  etc.  incurred  by  the  producers  are  in- 
cluded in  the  quantity  of  labor  required.  [See  p.  98].  Risks 
to  the  capital  employed  are  no  burden  in  themselves.  The  real 
burden  is,  in  part,  the  labor  of  taking  precautions  against  the 
danger,  and  in  part,  the  labor  of  repairing  the  damage  when 
loss  occurs.  The  burden  of  risk  is  therefore  resolvable  into 
labor;  it  simply  adds  to  the  quantity  of  labor  necessary  on  the 
average  for  accomplishing  a  given  result.  The  business  of  in- 
suring against  loss  by  fire,  shipwreck,  etc.  is  simply  a  useful 
device  for  distributing  the  actual  losses  among  all  who  incur 
the  risk :  a  small  payment  by  each  of  them  is  ordinarily  suf- 
ficient to  make  good  the  losses,  and  leave  a  profit  for  those 
who  conduct  the  insurance. 

The  risk  of  loss  to  individual  employers  and  dealers  by  a  fall 
in  the  value  of  their  goods,  is  strictly  no  part  of  the  burden 
of  production,  since  it  affects  only  the  comparative  earnings  of 
particular  individuals,  and  not  the  general  result  for  the  whole 
community.  What  one  man  loses  by  a  fall  of  value  other  men 
gain,  since  they  get  that  particular  commodity  more  cheaply 
than  they  could  naturally  have  hoped  to  get  it.  These  risks 
involve  a  chance  for  gain  as  well  as  a  danger  of  loss. 


CHAPTER  XII. 

EXCEPTIONS  TO  THE  GENERAL  LAW  OP  VALUE. 

1.  The  Value  of  Natural  Wealth,  —  The  general  law 
of  value  considered  in  the  preceding  chapter  applies 
only  to  wealth  on  which  labor  has  been  bestowed,  since 
that  alone  has  a  cost  of  production.  Things  that  have 
come  to  mankind  as  simple  gifts  of  the  Creator  acquire 
an  exchange  value,  as  we  have  seen  in  Chapter  V., 
when  the  demand  for  them  as  a  gratuity  exceeds  the 
supply. 

The  value  of  natural  wealth  of  any  kind,  at  any 
particular  place,  is  wholly  under  the  control  of  the  de- 
mand. The  supply  being  fixed,  whenever  the  demand, 
at  any  given  value,  exceeds  that  supply  the  value  rises. 
In  every  place  where  population  is  increasing,  this  rise 
of  value  is  usually  progressive.  It  is  the  process  by 
which  the  demand  for  the  natural  wealth  of  the  region 
is  kept  down  to  an  equality  with  the  fixed  supply. 

There  are  two  checks  on  this  local  rise  in  the  value 
of  natural  wealth.  The  first  of  these  is  the  power  of 
men  to  move  away  to  other  places  where  there  is  less 
crowding.  The  second  is  the  continual  cheapening  in 
the  cost  of  transportation,  which  enables  men  to  bring 
the  materials  of  production  from  regions  where  the 

109 


110  Political    Economy. 

local  demand  is  small  to  places  where  it  is  great.  Of 
course  things  so  transported  cease  to  be  strictly  natural 
wealth  and  become  wealth  produced  by  labor,  their  value 
being  regulated  by  the  cost  of  bringing  them.  But  in 
the  place  to  which  they  are  brought,  the  materials  of 
production  serve  the  same  purpose  as  if  they  had  been 
procured  on  the  spot.  The  additional  supplies  obtained 
from  other  places  keep  down  the  value  of  the  home 
supply. 

Such  things  as  do  not  admit  of  transportation  may 
rise  indefinitely  in  value  in  the  crowded  portions  of 
the  world.  As  already  noted,  land  for  building  pur- 
poses is  the  most  important  article  of  this  character. 
Yet  even  the  value  of  building  land  is  greatly  affected 
by  the  cheapening  and  quickening  of  transportation. 
In  one  sense  the  demand  for  building  ground  in  the 
cities  is  diminished  by  the  facility  with  which  men, 
whose  business  is  in  the  city,  are  enabled  by  the  rail- 
roads to  have  their  homes  in  the  country.  But,  on  the 
other  hand,  the  railroads  enable  vastly  greater  numbers 
to  congregate  in  the  cities  than  could  find  subsistence 
there  without  them.  The  result  is  that  cheap  trans- 
portation tends  powerfully,  in  the  long  run,  to  raise 
the  value  of  city  lands. 

2.    Products    that    cannot  be    increased    in    Supply.  - 
There  are  a  few  products  of  human  labor  which  cannot 
be   increased   at  will.      Old   pictures   and   statuary,  old 
furniture,  and  all   relics    of   by-gone    times    are   of   this 
nature.     The  value  of  all  such   articles  is  governed  by 


Exceptions  to  the  General  Law  of  Value.        Ill 

the  demand.  As  the  supply  is  fixed,  when  the  demand 
for  them  at  any  given  price  becomes  greater  or  less 
than  this  supply,  the  price  rises  or  falls  so  as  to  restore 
the  equality. 

Works  of  art  even  by  living  masters  have  their  value 
determined  in  the  same  way.  Though  subject  to  in- 
crease, they  cannot  be  indefinitely  increased,  since  only 
one  person  in  each  case  has  the  gift  of  producing  them. 
In  practice  it  is  nearly  as  if  the  supply  of  such  works 
were  absolutely  limited.  The  demand  for  the  produc- 
tions of  real  artists  is  always  greatly  in  excess  of  the 
supply,  except  at  values  far  above  that  of  other  things 
having  the  same  cost  of  production. 

The  inventor  of  any  new  article  is  given,  by  the  laws 
of  most  countries,  the  exclusive  right  of  manufacturing 
the  article  for  a  limited  term  of  years  (in  the  United 
States  seventeen  years).  An  article  covered  by  a  patent 
may  be  classed,  as  far  as  the  general  body  of  producers 
are  concerned,  with  things  that  cannot  be  increased  in 
supply  at  will.  Yet,  in  practice,  such  articles  are  pro- 
duced freely  in  answer  to  the  demand.  The  effect  of  the 
patent  is  to  enable  the  owner  of  it  to  obtain  an  extra 
profit  or  royalty  on  the  manufacture.  In  other  words,  it 
enables  him  to  hold  the  market  value  somewhat  above 
the  natural  value,  —  that  is,  if  his  invention  should  meet 
with  a  ready  demand. 

There  is  a  constant  effort  on  the  part  of  producers  and 
traders  to  obtain,  as  regards  ordinary  commodities,  a  sim- 
ilar advantage  by  the  use  of  tradei^ftflaiiifi^^Where  trade- 


112  Political    Economy. 

marks  enjoy  legal  protection,  they  enable  the  producer  of 
any  commodity  to  keep  exclusive  control  of  the  market 
for  his  own  particular  brand  or  "  make  "  of  the  article. 
The  primary  effect  of  trade-marks  may  be  to  serve  as  a 
guarantee  of  quality  for  the  consumer.  They  save  the 
consumer  some  trouble  of  investigation  at  each  purchase. 
But  for  this  very  reason  they  may  enable  the  possessor 
of  an  established  brand  to  obtain  more  for  his  product 
than  other  less-known  producers  are  getting  for  the  same 
quality. 

3.  Products  of  Skilled  Labor.  —  The  value  of  products 
requiring  special  skill  or  long  training  on  the  part  of  the 
producers,  is  not  fully  controlled  by  the  cost  of  produc- 
tion. Such  products  are  permanently  higher  in  value 
than  ordinary  products  made  by  the  same  quantity  of 
labor  and  waiting. 

The  reason  is  two-fold.  .  First,  the  need  of  skill  limits 
the  number  of  persons  who  are  able  to  make  these 
articles :  the  general  mass  of  laborers  are  effectually 
barred  out  from  the  business  by  lack  of  this  essential 
qualification.  Secondly,  the  demand  for  these  products, 
if  they  were  offered  for  sale  at  their  natural  prices, 
would  far  exceed  the  supply  which  this  limited  num- 
ber of  laborers  can  produce.  The  high  value  is  caused 
by  this  large  demand  acting  on  a. restricted  supply. 

But  why  do  not  more  of  the  laborers  learn  the  neces- 
sary skill?  The  answer  to  this  is  that  it  is  costly  to 
acquire  skill ;  further,  the  outlay  is  for  a  somewhat  dis- 
tant object.  The  same  reasons  which  prevent  the  mass 


Exceptions  to  the  General  Law  of  Value.        113 

of  laborers  from  acquiring  capital,  also  prevent  them 
from  acquiring  skill.  Few  among  them  are  able  and 
willing  to  save  from  their  slender  incomes  the  means 
whereby  they  themselves,  or  their  children,  may  acquire 
the  training  necessary  for  the  higher  grades  of  produc- 
tive labor.  The  young  laborers,  partly  no  doubt  from 
necessity,  partly  however  from  eagerness  to  earn  quickly 
something  of  their  own,  turn  to  industries  in  which  little 
or  no  preliminary  training  is  needed. 

Thus  it  happens  that  the  numb,  r  of  men  in  the  skilled 
trades  is  never  large  enough  to  supply  all  the  products 
of  skill  that  would  readily  sell  at  their  natural  value. 
The  resulting  high  market  value  is  the  premium  con- 
stantly paid  by  the  community  to  induce  laborers  to 
make  the  sacrifice  necessary  for  obtaining  skill.1 

This  is  obviously  a  case  of  defective  competition 
among  producers.  The  rule  of  equal  rewards  for  equal 

1  Of  course  all  the  actual  labor  and  waiting  demanded  in  acquiring 
skill  are  included  in  the  cost  of  production.  The  point  is  that  the 
value  of  skilled  products  is  ordinarily  considerably  above  that  of  other 
things  costing  the  same  amount  of  labor  and  waiting.  The  labor  of 
the  skilled  occupations  is,  in  itself,  usually  lighter  and  more  agreeable 
than  that  of  the  unskilled.  Yet,  day  for  day,  its  products  are  always 
a  good  deal  higher  in  value,  in  some  cases  two  or  three  times  higher. 
It  is,  of  course,  possible  to  maintain  that  the  reluctance  or  inability  of 
common  laborers  to  strive  for  skill  is  a  part  of  the  cost  of  production 
in  these  cases ;  and  that  the  natural  value  here,  as  in  the  case  of 
unskilled  products,  is  a  rough  average  of  the  actual  market  value.  In 
this  view  the  only  peculiarity  in  the  case  of  skilled  products  is  the  fact 
that  a  considerable  part  of  the  waiting  necessary  in  producing  them, 
has  to  be  borne  by  a  class  of  men  who  find  long  waiting  very  burden- 


some. 


114  Political  Economy. 

sacrifices,  which  keeps  market  value  in  touch  with  natu- 
ral value,  takes  effect  only  where  men  ordinarily  choose 
the  industries  that,  all  things  considered,  offer  best  re- 
turns for  the  sacrifices  demanded.  If  the  producers, 
especially  those  who  are  beginning  life,  customarily  neg- 
lect their  best  opportunity  in  any  direction,  the  full  and 
direct  control  of  natural  value  over  market  value  is  to 
that  extent  defeated. 

It  is  not,  however,  even  in  these  cases,  wholly  pre- 
vented. The  market  value  of  skilled  products  is  always 
above  the  natural  value ;  but  the  interval  between  them 
is  not  a  matter  of  mere  accident.  It  depends  on  the 
amount  of  inducement  required  in  order  to  make  par- 
ents and  young  laborers  willing  to  face  the  cost  of  ac- 
quiring skill.  At  this  interval,  the  market  value  is 
held  in  check,  in  the  ordinary  way,  by  the  cost  of  pro- 
duction. Competition  is  obstructed ;  but,  with  an  allow- 
ance for  the  obstruction,  it  works  as  in  other  cases. 

4.  Exchange  between  Distant  Places,  —  A  similar  ob- 
stacle to  freedom  of  competition  among  producers  is 
found  in  the  case  of  men  in  different  countries,  and 
even  in  distant  parts  of  the  same  country.  Any  two 
places  are  distant  from  each  other  in  the  sense  here 
intended  if  there  are  serious  impediments  to  the  free 
movement  of  laborers  from  the  one  to  the  other. 

The  impediment  may  be  difference  of  language,  or  of 
religion,  or  of  social  customs,  or  of  climate;  or  it  may 
be  mere  national  prejudice,  or  love  of  home  and 
friends,  or  the  difficulties  and  cost  of  the  journey. 


Exceptions  to  the  General  Law  of  Value.        115 

When  a  trade  exists  between  two  places  distant 
from  each  other  in  any  of  these  ways,  the  active  prin- 
ciple that  keeps  exchange  on  the  basis  of  cost  of  pro- 
duction is  lacking.  The  only  reason  why  we  can  say 
that  market  value,  in  any  case  of  exchange,  tends  to 
conform  to  the  cost  of  production,  is  the  fact  that  pro- 
ducers may  ordinarily  be  counted  on  to  choose  among 
their  home  industries  those  that  offer  best  returns. 
The  difficulty,  in  trade  between  distant  places,  is  that 
they  are  largely  prevented  from  doing  this.  In  the 
exchange  of  commodities  between  countries,  it  is  there- 
fore possible  that  the  products  of  the  one  shall  have 
regularly  a  higher  value,  as  compared  with  those  of 
the  other,  than  the  cost  of  production  on  either  side 
would  suggest.  For  example,  the  United  States,  in 
trading  with  Brazil  or  with  China,  may  ordinarily  ob- 
tain for  the  product  of  two  days'  labor  here,  commod- 
ities that  cost  five  days'  labor  in  the  other  country. 

Further  discussion  of  this  very  interesting  portion  of 
our  subject  will  be  found  under  the  head  of  Interna- 
tional Trade. 

5.  Things  having  a  Joint  Cost  of  Production.  —  We 
have  thus  far  spoken  as  if  every  commodity  were  the 
result  of  a  separate  and  independent  outlay  of  pro- 
ductive labor.  In  point  of  fact  very  many  products 
are  coupled  in  production  with  other  products,  so  that 
the  one  is  never  produced  without  the  other.  The 
production  of  wheat  is  also  the  production  of  straw; 
the  production  of  wool  involves  that  of  mutton;  the 


116  Political    Economy. 

production  of  beef  that  of  hides  and  tallow,  etc. 
Nearly  every  sort  of  production  has  some  by-product 
or  products  of  more  or  less  commercial  importance. 

It  is  to  be  noted  that  men  cannot  in  these  cases 
regulate  the  proportions  in  which  the  several  associated 
articles  shall  be  produced.  Nature  fixes  the  ratio  for 
us.  In  order  to  increase  or  diminish  the  supply  of  beef 
we  must  also  increase  or  diminish  in  the  same  propor- 
tion the  supply  of  hides,  horns,  hair,  tallow,  etc. 

The  natural  value  of  the  whole  group  of  products 
resulting  from  the  raising  of  an  ox  is,  of  course,  deter- 
mined by  the  cost  of  raising  the  animal.  The  relative 
value  of  each  separate  product  in  the  group  depends  on 
comparative  supply  and  demand.  The  stronger  the  de- 
mand for  each  product,  in  comparison  with  its  quantity, 
the  higher  its  relative  value. 

Suppose  that,  at  the  existing  prices  of  beef,  hides,  and 
tallow,  the  demand  for  beef  increases,  without  increase 
of  demand  for  the  other  products.  The  price  of  beef 
will  rise.  This  makes  the  raising  of  oxen  more  profitable 
than  before:  the  production  of  beef  will  be  increased. 
But  this  brings  also  an  increased  supply  of  the  associated 
products  ;  and  since  there  is  no  increase  of  demand  for 
these,  the  price  of  them  must  fall  in  order  to  create 
more  demand.  In  the  end,  what  is  gained  by  the  rise 
in  the  value  of  beef  is  lost  by  the  fall  in  value  of  the 
associated  products,  —  the  combined  value  of  the  whole 
group  tending  always  to  conform  to  the  cost  of  producing 
the  animal  from  which  they  are  made. 


Exceptions  to  the  General  Law  of  Value.        117 

6.  Arbitrary  Exceptions.  —  There  is  a  further  class  of 
exceptions  to  the  general  law  of  value,  arising  from  in- 
tentional interference  with  the  free  course  of  industry. 

An  example,  now  fortunately  much  rarer  than  in 
former  times,  is  seen  in  the  case  of  things  produced  by 
slaves.  Slave  labor  is  not  adapted  for  any  but  the  crud- 
est occupations ;  usually  it  is  confined  to  a  few  industries. 
It  is  not  open  to  the  slaves  to  leave  these  industries  when 
the  products  fall  below  their  natural  value ;  nor  is  it  for 
the  master's  interest  to  withdraw  them.  The  result  is, 
that  the  value  of  slave  products  may  be  permanently 
below  that  of  other  things  made  in  the  same  country  by 
an  equal  quantity  of  free  labor. 

In  some  cases  men  who  trade  in  several  commodities 
single  out  one  of  them  for  exceptional  treatment,  —  set- 
ting the  price  of  it  rather  with  a  view  to  drawing  custom- 
ers than  to  making  a  profit.  The  commodity  selected  for 
the  purpose  needs  to  be  one  in  common  use,  as  to  the 
usual  price  of  which  there  is  general  knowledge,  so  that 
the  buyer  may  recognize  a  good  bargain  when  one  is 
offered  to  him.  In  such  cases  the  dealer  counts  on  mak- 
ing up  for  the  lack  of  profit  on  his  decoy,  by  increasing 
his  sales  of  other  things. 

The  result  is  sometimes,  however,  to  establish  for  a 
time,  a  low  price  for  the  article  at  all  the  competing 
shops.  It  is  commonly  understood,  for  example,  that 
retail  grocers  in  most  parts  of  the  United  States  have 
not  been  making  any  profit  by  the  sale  of  sugar  for  a 
number  of  years  past.  They  have  had  to  compensate 


Political  Economy. 


themselves,  of  course,  by  charging  higher  prices  for  other 
things. 

7.  Combinations,  Trusts,  etc.  —  In  some  cases  those  who 
have  a  commodity  for  sale  are  able  to  combine  to  keep 
up  the  price  of  it.  At  the  time  of  writing  these  pages, 
there  is  much  talk  of  "trusts"  and  other  combinations 
for  raising  the  prices  of  various  articles.  If  a  commod- 
ity be  produced  in  a  few  places  only,  or  by  a  few  large 
establishments  only,  its  price  may  be  fixed  by  agreement 
between  the  producers  rather  than  by  competition. 

In  order  that  the  price  may  be  kept  much  above  the 
natural  price,  those  who  make  the  combination  must  be 
able  to  prevent  other  men  from  entering  the  business. 
This  they  can  do  in  the  long  run,  only  by  gaining  control 
of  most  of  the  available  sources  of  supply. 

A  combination  controlling  the  whole  supply  of  a  com- 
modity might  extort  from  the  consumers  any  price  it 
chose.  But  even  in  such  a  case  the  monopolists  might 
discover  that  it  would  not  be  for  their  own  advantage  to 
charge  much  more  than  the  natural''  price.  /  A  high  price 
lessens  the  demand  for  any  article./  There  are  few  things 
which  are  absolutely  necessary,  ancl  for  which  no  tolerable 
substitute  can  be  found.  Mostly,  therefore,  any  attempt 
to  extort  an  unreasonable  price  for  an  article  would  only 
result  in  loss  to  the  monopolists.  They  would  have  to 
limit  their  production  very  much  in  order  to  find  a  market. 
It  is  probable  that  the  most  advantageous  price  for  the 
producers  of  all  ordinary  articles  is,  in  the  long  run,  the 
one  that  corresponds  most  nearly  to  the  natural  price. 


Combinations,  Trusts,  etc.  119 

Yet  it  is  undoubtedly  true  that  a  combination  among 
the  producers,  or  even  the  chief  producers  of  a  commod- 
ity, may  succeed  for  a  time  in  raising  the  price  of  their 
product.  This  is  especially  true  where  large  plant  is 
required  for  the  production.  The  mere  time  necessary 
for  starting  a  competing  establishment  may  be  consider- 
able. Further,  the  greatness  of  the  outlay  required,  and 
the  risk  of  loss  in  facing  a  competition  with  the  combin- 
ation, may  deter  outsiders  for  a  considerable  period  from 
embarking  in  the  business.  To  that  extent  the  com- 
munity is  always  exposed  to  injury  at  the  hands  of  a 
combination. 

Our  best  protection  against  monopolies  has  hitherto 
been  the  difficulty  of  forming  and  maintaining  effective 
combinations.  Where  the  means  of  production  are  wide- 
spread and  producers  are  numerous,  effective  combina- 
tion is  probably  impossible.  Even  where  the  sources  of 
production  are  limited,  it  has  yet  to  be  shown  that  effec- 
tive combination  can  be  made  permanent.  No  monopoly 
has  in  the  past  succeeded  in  maintaining  itself  for  any 
length  of  time  unless  sustained  by  force  of  law.  In  a 
country  where  the  laws  allow  perfect  freedom  of  indus- 
try, I  think  there  is  no  serious  danger  to  be  apprehended 
from  t(  trusts  "  or  other  combinations  to  interfere  with  the 
natural  course  of  production  and  exchange.  In  the  end 
every  such  attempt  is  likely  to  bring  loss  rather  than 
gain  to  those  who  make  it. 

It  must  not  be  inferred  from  the  space  devoted  to 
exceptional  commodities  in  this  chapter,  that  they  con- 


120  Political  Economy. 

stitute  a  very  large  proportion  of  all  the  things  bought 
and  sold,  or  that  their  value  departs  very  widely  from 
the  ordinary  rule.  Compared  with  the  great  mass  of 
exchanges  subject  to  the  ordinary  rule,  they  are  very 
small  in  amount :  and  the  extent  of  their  departure  from 
the  common  law  of  value  is  not  often  great. 

QUESTIONS   AND    EXERCISES. 

1.  Explain  the   distinction  between  Value  and   Price.     Show 
that  the  price  of  a  thing  may  change  without  a  change  of  its 
value. 

2.  Remembering  that  every  article   may  fall   in  value,  show 
whether  all  things  may  fall  in  value  together. 

3.  How  does  a  change  in  the  value  of  money  show  itself  ?    Has 
money  a  price  ? 

4.  What  is  meant  by  the  "equilibrium  of  demand  and  supply"? 
How  is  it  maintained  from  day  to  day? 

5.  What  do  you  understand  by  the  Natural  Value  of  any  com- 
modity ?    What  may  cause  it  to  change  ? 

6.  When  the  market  value  of  any  commodity  is  above  its  nat- 
ural value,  what  ground  is  there  for  anticipating  a  fall  ?    Should 
you  expect  the  fall  to  come  equally  soon  in  all  cases  ?     Compare, 
for  example,  apples,  beef,  coal,  and  paving-stones. 

7.  Are  there  any  products  whose  market  value  is  always  above 
their  natural  value  ?     Any  always  below  ?    Why  ? 

8.  Explain  carefully  the  distinction  between  employer's  Cost  of 
Production,  and  the  true  or  Economic  Cost. 

9.  Show  that   the   employer's  cost  of   production  may  change 
without  any  change  in  the  true  cost. 

10.  How  should  you  proceed  to  analyze  the  economic  cost  of 
producing  a  woolen  coat  ?     What  account  should  you  make  of 
the  loom  on  which  the  cloth  was  woven? 


Questions  and  Exercises.  121 

11.  Explain  the  term  "quantity  of  labor"  as  used  in  defining 
cost  of  production  '? 

12.  If  two  articles  are  produced  by  equal  quantities  of  labor 
why  can  we  not  assume,  without  further  knowledge  about  them, 
that  they  will  ordinarily  have  the  same  exchange  value  ? 

13.  Explain  the  remark  that  "  the  law  of  natural  value  is  simply 
the  just  rule  of  equal  rewards  for  equal  sacrifices."     How  is  the 
rule  put  in  force  ? 

14.  If  one  should  argue  that  the  invention  of  reaping-machines 
has  benefited  farmers  only,  how  should  you  answer  him  ? 

15.  How  is  the  value  of  building  land  determined  ?     What  pro- 
ducts of  labor  have  their  value  determined  in  the  same  general 
way,  and  why? 

16.  Suppose  a  machine  invented  that  gives  us,  for  half  of  the 
previous   labor,  an  article    formerly  made  by  hand ;   should  you 
expect  the  value  of  the  article  to  fall  to  half  of  its  old  value. 

17.  Is  there  any  connection  between  the  value  of  products  of 
skilled  labor  and  their  economic  cost  of  production  ? 

18.  How  is  the  value  of  wool  determined?    Suppose  the  demand 
for  mutton  should  increase  without  increase  of  demand  for  wool, 
how  and  by  what  steps  would  the  value  of  wool  be  affected  ? 

19.  In  what  cases  are  "  trusts  "  likely  to  succeed  in  maintaining 
high  prices  ?     What  is  necessary  in  order  to  insure  permanent 
success  ? 

20.  Supposing  it  were   possible  for  all  producers  to  combine 
effectively,  what  effects  should   you  anticipate  from  a  universal 
system  of  trusts? 

21.  Howr  do  you  explain  the  fact  that  a  diamond  necklace  is 
worth  so  much  more  than  a  barrel  of  flour,  —  seeing  that  bread 
is  so  much  more  necessary  than  jewelry  ? 

22.  Suppose  a  man  loses  $1,000,000  by  a  fall  in  the  price  of 
wheat,  show  whether  the  world  is  poorer  by  that  amount. 


CHAPTEE  XIII. 

OF  PRICES,  OR  THE  VALUE  OF  MONEY. 

1.  Importance  of   Changes   in    the  Value    of   Money.— 

The  value  of  money  is  expressed  by  the  general  level 
of  prices.  When  the  value  of  money  rises  the  change  is 
shown  by  a  general  fall  of  prices,  and  vice  versa.  Money 
has  itself  no  price;  a  dollar  is  always  worth  a  dollar, 
whether  the  exchange  value  of  money  be  high  or  low ; 
but  every  change  in  the  general  level  of  prices  makes 
each  dollar  worth  more,  or  less,  of  other  things  than 
it  was  worth  before. 

So  far  as  the  mere  exchanging  of  products  is  con- 
cerned, it  obviously  makes  no  difference  to  the  exchan- 
gers whether  the  prices  be  all  high  or  all  low.  If,  for 
example,  a  man  has  a  hundred  bushels  of  wheat  to 
exchange  for  cotton  cloth,  it  makes  no  difference  to  him 
whether  the  wheat  be  a  dollar  a  bushel  and  the  cloth 
ten  cents  a  yard;  or  the  wheat  five  dollars  a  bushel 
and  the  cloth  fifty  cents  a  yard.  It  is  only  compara- 
tive prices  that  tell  in  simple  exchange.  If  the  price 
of  wheat  should  change,  the  price  of  cloth  remaining 
stationary,  that  would  affect  the  values  of  the  two 
articles. 

122 


The   Value  of  Money.  123 

But  though  the  general  level  of  prices  is  immaterial 
in  simple  exchange,  it  is  highly  important  in  some 
other  ways.  Much  of  the  business  of  the  world  involves 
agreements  to  pay  money  in  the  future.  All  loans, 
especially  loans  for  long  periods,  such  as  are  represented 
by  city,  state,  and  national  bonds,  are  of  this  character; 
also  all  contracts  for  the  future  delivery  of  goods  at  set 
prices.  If  the  value  of  money  change  in  the  meantime, 
evidently  the  basis  of  the  agreement  is  disturbed  to  the 
disadvantage  of  one  of  the  parties  to  it. 

Again,  the  wages  of  laborers  (including  salaries  of  all 
grades)  are  agreed  upon  in  money.  Every  general  rise 
or  fall  of  prices  lowers  or  raises  the  real  wages  of  all 
persons  who  work  for  hire.  Of  course  the  wage  agree- 
ments may  be  revised;  but  they  are  never  revised  at 
once,  and  for  mere  temporary  fluctuations  of  prices  they 
could  hardly  be  revised  at  all. 

2.  Market  Value  and  Natural  Value  of  Money. — True 
money  is  always  a  product  of  labor.  Every  nation  has 
the  power  to  choose  the  product  of  which  its  money 
shall  consist.  In  past  times  there  was  a  good  deal  of 
diversity  in  the  money  of  different  peoples;  some  used 
cattle,  some  iron,  some  bronze,  and  some  silver;  others 
used  shells,  others  salt,  and  still  others,  tea.  In  modern 
times  all  civilized  nations  agree  in  using  gold  and  silver. 
The  essential  qualities  of  true  money  are  that  it  shall 
have  a  value  of  its  own,  that  it  shall  be  convenient,  and 
that  it  shall  be  as  little  as  possible  exposed  to  fluctuations 
of  value. 


124  Political    Economy. 

True  money  being  a  product  of  labor,  it  has,  like  all 
other  products,  a  natural  or  normal  value  depending  on 
the  cost  of  producing  it.  Also  it  has,  like  all  other 
products,  a  market  value  depending  immediately  on 
supply  and  demand,  but  tending  in  the  long  run  to  con- 
form to  the  natural  value.  There  are,  however,  some 
notable  peculiarities  in  the  case  of  money  which  call 
for  a  special  discussion  of  its  law  of  value.  In  the 
present  chapter  we  shall  confine  our  attention  to  its 
market  value  alone. 

3.  Meaning  of  the  Supply  of  Money.  —  The  supply  of 
money,  like  the  supply  of  every  other  article,  is  the 
amount  of  it  offering  in  exchange  for  other  things. 
But  the  supply  of  every  other  article  is  kept  down  by 
the  constant  drain  made  upon  it  by  the  purchases  of 
consumers.  The  amount  of  it  in  the  market  at  any 
time  consists  mainly  of  newly-made  specimens.  In  the 
case  of  money  there  is  little  or  no  buying  for  con- 
sumption. We  buy  it  (i.e.  give  other  things  in  exchange 
for  it),  not  intending  to  keep  it,  but  to  pay  it  away  again 
for  other  things.  The  supply  of  money  consists,  there- 
fore, mostly  of  old  pieces.  The  same  old  money  is  paid 
again  and  again  for  goods,  until  it  becomes  so  worn  as 
to  need  recoining. 

Now  every  time  a  piece  of  money  is  used  in  making 
an  exchange,  it  counts  in  the  supply  of  money  quite  as 
effectually  as  if  it  were  a  new  piece.  It  follows  that 
in  order  to  ascertain  the  supply  of  money  in  a  country, 
we  should  have  to  do  something  more  than  merely  to 


The  Demand  for  Money.  125 

count  the  number  of  dollars  or  pounds  in  its  currency ; 
we  should  have  to  take  into  account  the  number  of 
times  each  dollar  is  used  in  exchange  in  a  given  period. 
This  is  called  the  Kapidity  of  Circulation  of  money. 

The  rapidity  with  which  money  circulates  in  a 
country  depends  partly  on  the  business  arrangements 
and  partly  on  the  temperament  of  its  people.  We 
shall  have  occasion  to  discuss  the  subject  fully  a  little 
farther  on. 

4.  Peculiar  Character  of  the  Demand  for  Money.  — 
The  demand  for  money  is  also  marked  by  two  notable 
peculiarities.  The  first  of  these  is  its  remarkable  steadi- 
ness. Money  being  the  medium  for  making  exchanges, 
the  demand  for  it  is  as  great  as  the  demand  for  all  other 
things  put  together;  the  demand  for  every  other  thing 
presents  itself  first  in  the  form  of  a  demand  for  the 
money  wherewith  to  buy  it. 

Putting  the  same  fact  in  another  way,  the  demand 
for  money  consists  of  all  the  things  offering  for  sale,  or 
needing  to  be  sold.  Evidently,  therefore,  it  depends  on 
the  total  production  of  things,  and  this,  as  we  easily  see, 
must  be  slow  to  change.  It  follows  that  the  demand 
for  money  has  greater  steadiness  than  the  demand  for 
any  other  thing.  Changes  of  fashion,  so  powerful  in 
other  cases,  have  no  effect  on  the  demand  for  money 
since  they  imply  no  change  in  the  total  product  of 
labor. 

Again,  merely  anticipated  changes  of  supply,  owing 
to  changes  in  the  conditions  of  production,  can  have 


126  Political  Economy. 

but  little  influence  on  the  demand  for  money.  If  the 
wheat  crop  threatens  to  be  deficient,  the  demand  for 
wheat  increases  and  the  value  rises  at  once.  If  a  new 
copper  mine  is  discovered,  the  demand  for  copper  falls 
off  at  once:  intending  buyers  will  not  buy  much  at 
the  old  value,  and  holders  of  it  must  lower  the  price 
before  a  single  pound  of  the  new  copper  is  in  the 
market. 

But  the  demand  for  money  does  not  fluctuate  for 
such  causes;  it  can  be  changed  only  by  changing,  the 
total  quantity  of  things  for  sale.  To  give  up  demanding 
money  would  be  to  give  up  trying  to  sell  goods.  Fur- 
ther, it  would  be  impossible  to  get  more  money  for  goods 
this  year  because  the  supply  of  money  is  likely  to  be 
greater  next  year.  Prices  are  as  high  already  as  the 
existing  supply  of  money  will  allow  them  to  be,  on  con- 
dition of  selling  things  as  rapidly  as  they  are  produced. 

The  second  peculiarity  of  the  demand  for  money  is 
that,  being  in  fact  a  demand  for  other  things,  it  is 
satisfied  with  any  substitute  or  representative  of  actual 
money  which  will  a'nswer  equally  well  the  real  end  in 
view.  Now  we  shall  see  presently  that  men  have  in- 
vented some  excellent  substitutes  for  money,  —  together, 
unfortunately,  with  some  very  bad  ones.  A  very  small 
proportion  of  the  payments  made  for  goods  in  this 
country  are  now  made  with  coin.  We  find  mere  paper 
evidences  of  the  right  to  get  gold  and  silver  on  de- 
mand a  more  convenient  sort  of  currency  for  ordinary 
purposes  than  actual  gold  and  silver  coins. 


How  Prices  are  Fixed.  127 

The  result  is  that  the  offer  of  goods  for  sale  has 
now  become  a  nominal  rather  than  a  real  demand  for 
true  money.  It  is  in  practice  a  demand  for  the  mere 
right  to  get  true  money  in  case  of  need,  but  with  a 
practical  certainty,  in  most  cases,  that  the  seller  will  find 
the  mere  right  itself  entirely  sufficient  for  his  purpose. 
In  fact,  then,  the  real  demand  for  money  is  limited  to 
such  a  sum  as  may  enable  the  banks  and  the  Treasury 
to  pay  coin  to  every  holder  of  the  right  to  get  coin,  who 
chooses  to  exercise  his  right. 

I  shall  not  wait  in  this  chapter  to  discuss  the  various 
substitutes  for  money,  and  the  peculiar  effects  of  each. 
Our  present  task  is  to  consider  the  operation  of  supply 
and  demand  in  determining  the  market  value  of  money, 
or  the  general  level  of  prices  at  any  given  time.  For 
the  moment  we  shall  regard  as  money  everything  that 
the  people  accept  as  money.  Since  true  money  and 
all  the  honest  substitutes  for  it  rise  and  fall  in  value 
together,  we  run  no  risk  of  falling  into  error  by  tempo- 
rarily treating  the  whole  currency,  whatever  its  amount 
and  composition,  as  if  it  consisted  wholly  of  true 
money. 

5.  How  the  General  Level  of  Prices  is  Fixed.  —  The 
problem  of  the  value  of  money,  or  the  general  level  of 
prices,  is  one  of  considerable  difficulty.  In  order  to 
master  it,  the  student  must  consider  carefully  every 
point  in  the  case. 

In  the  first  place,  it  is  to  be  remembered  that  things 
must  be  sold  as  fast,  on  the  whole,  as  they  are  produced  ; 


128  Political  Economy. 

otherwise  the  markets  become  glutted.  The  efforts  of 
the  producers  and  dealers  are  directed  towards  obtain- 
ing for  all  articles  the  highest  prices  at  which  the 
whole  product  will  sell.  The  producers  are  especially 
interested  in  having  the  price  as  high  as  possible.  The 
dealers,  however,  must  take  care  that  the  goods  on 
hand  shall  move  off  as  rapidly  as  new  goods  come  for- 
ward from  the  producers.  If  they  find  products  accumu- 
lating on  their  hands  they  must,  in  self-protection,  set 
the  prices  lower,  both  when  they  buy  and  when  they 
sell. 

Now,  in  order  that  exchange  may  keep  pace  with 
production,  it  is  necessary  that  the  amount  of  money 
demanded  for  the  whole  product  of  industry  shall  be 
roughly  equal  to  the  whole  supply  of  money  offering 
for  goods.  In  other  words,  if  you  add  together  the 
prices  of  all  the  goods  needing  to  be  sold  each  week, 
the  sum  of  them  must  be  roughly  equal  to  the  amount 
of  money  the  buyers  are  able  and  willing  to  spend  in 
the  purchase  of  goods  each  week. 

If,  for  example,  the  aggregate  of  the  prices  asked 
for  the  week's  product  be  one  hundred  and  two  mill- 
ions, and  the  people  have  only  one  hundred  millions 
to  spend  in  buying,  it  is  clear  that  about  two  per  cent, 
of  the  goods  must  remain  unsold.  In  this  situation 
prices  must  fall ;  that  is  to  say,  the  value  of  money 
must  rise. 

If,  on  the  other  hand,  the  prices  asked  be  ninety- 
eight  millions,  the  supply  of  money  being  a  hundred 


Hoiu  Prices  are  Fixed.  129 

millions,  the  stocks  on  the  hands  of  the  dealers  will 
get  sold  faster  than  new  goods  can  be  found  to  replace 
them.  In  this  case  the  prices  must  rise,  that  is  to 
say,  the  value  of  money  must  fall. 

Since,  however,  buying  and  selling  are  only  the 
separated  halves  of  the  general  exchange  of  products, 
the  prices  paid  are  on  the  whole  identical  with  the 
prices  received.  It  may  seem  therefore  that  the  buyers 
may  pay  as  much  as  they  receive,  and  that  there  is 
really  no  limit  to  the  prices  that  might  be  charged  and 
paid. 

This  would  be  true  if  product  were  exchanged  directly 
for  product,  using  the  price  of  each  simply  as  a  means 
of  comparison.  But  where  money  of  any  kind  has  to  be 
used,  there  is  at  once  a  question  of  the  sufficiency  of 
the  supply  of  it  to  carry  on  the  exchanges  at  a  given 
scale  of  prices.  No  part  of  the  money  can  be  in  two 
places  at  once.  Everywhere  that  a  payment  is  being 
made,  there  must  be  money  enough  to  make  it;  and 
the  same  money  cannot  be  used  in  making  another 
exchange  until  the  receiver,  or  somebody  else  receiving 
it  from  or  through  him,  uses  it  again  in  buying  goods. 

This  brings  us  ba.ck  to  the  two  things  which  deter- 
mine the  supply  of  money;  the  quantity  of  it  in  cir- 
culation and  the  rapidity  of  its  circulation.  The  quan- 
tity being  a  simple  question  of  the  number  of  dollars 
in  use,  it  is  not  likely  to  perplex  the  student.  We 
shall  consider  in  the  next  chapter  the  circumstances  on 
which  the  quantity  of  money  depends.  The  circum- 


130  Political  Economy. 

stances  determining  its  rapidity  of  circulation  are  equally 
influential  in  fixing  the  general  scale  of  prices,  and  are 
at  the  same  time  much  less  simple.  We  must  there- 
fore try  to  gain  some  clear  ideas  regarding  them. 

6,  the  Movements  of  Money.  —  The  movements  of 
money  in  detail  are  exceedingly  intricate,  but  there 
are  certain  great  currents  of  circulation  which  are  cre- 
ated and  determined  by  the  business  arrangements  of 
each  country.  These  are  not  hard  to  follow,  and  they 
are  sufficient  at  least  to  explain  the  meaning  of  "rap- 
idity of  circulation "  in  its  bearing  on  prices.  In 
studying  them  the  following  hints  may  be  helpful. 

(a)  It  is  most  convenient  here  to  confine  our  atten- 
tion to  prices  at  retail.    Though  these  are  not  uniform, 
not  being  fully  under  the  control  of  competition,  never- 
theless it  is  at  retail  that  the  true  exchange  of  products 
is  effected.     The  transfers  of  goods  from  the  producers 
to  wholesale    merchants,  and   from   these  to  the  retail 
merchants,  look  towards  the  final  sale  to  consumers  and 
are  designed  to  facilitate  this.     For  our  present  purpose, 
prices  at  wholesale  may  be  regarded  as  conforming   to 
prices  at  retail,  with  an  interval  sufficient  to  give  the 
retail  merchant  the  ordinary  rate  of  profit.     In  the  same 
way  the  prices   at  wholesale   may  be   regarded  as  con- 
forming to  the  prices   the  wholesale  merchants  pay  to 
the  producers  ;  these  latter,  in  turn,  depend  on  the  em- 
ployers cost  of  production,  and  this,  as  we  have  seen, 
on  money  wages. 

(b)  When  money  has  once  been  used  in  the  purchase 


The  Movements  of  Money.  131 

of  goods  for  the  buyer's  consumption,  it  cannot  be  simi- 
larly used  again  until,  in  the  course  of  business,  somebody 
again  receives  it  in  payment  for  labor  or  waiting,  and 
chooses  to  spend  it  in  that  way.  If  the  receiver  should 
choose  to  save  it  for  paying  wages  to  productive  laborers, 
or  to  spend  it  in  paying  for  non-productive  services  of 
any  kind,  the  circulating  period  is  likely  to  be  longer 
than  if  he  should  buy  goods  with  it  himself.  Again, 
if  the  receiver  of  the  wages  should  in  turn  save  it  for 
use  in  hiring  another  man,  instead  of  buying  goods 
with  it  for  himself,  the  circulating  period  is  likely  to 
be  still  further  lengthened. 

(c)  After  each  use  of  money  in  buying  goods  for  the 
buyer's  own  consumption,  the  business  arrangements  of 
the  country  may  require  it  to  make  a  considerable  cir- 
cuit before  it  car.  reach  the  person  who  is  next  to  use 
it  in  similar  buying.  The  money  that  pays  for  goods  at 
retail  must  find  its  way  back  through  all  the  channels 
by  which  the  goods,  and  the  materials  for  making  them, 
come  forward  in  the  course  of  production  arid  exchange. 
Some  of  it  must  go  to  each  person  whose  labor  or  wait- 
ing aids  in  producing  goods  or  in  conveying  them  to  the 
consumer.  The  number  of  hands  through  which  it  must 
pass  in  reaching  the  next  man  to  spend  it,  and  the  delay 
at  each  stage  of  its  passage,  determine  the  length  of  time 
that  must  elapse  between  each  use  of  money  in  paying 
for  goods  at  retail,  and  the  next  similar  use.1 

1  It  may  be  well  to  state  that  these  principles  relate,  not  to  par- 
ticular pieces,  but  to  sums  of  money.  Each  dollar  being  the  precise 


132  Political  Economy. 

(d)  It  is  evident  at  once  that  the  circulating  period  is 
not  the  same  for  all  parts  of  the  currency.     The  sellers 
at  retail  spend  a  part  of  the  money  they  receive  in  buy- 
ing things  for  their  own  use  and  that  of  their  families. 
The  money  so  used  returns  quickly  to  become  again  part 
of   the  supply  acting  on  prices :    it  makes  the  shortest 
circuit  that  is  possible.     Very  different   is   the   circuit 
made  by  money  which  is  used  by  the  retail  merchant 
in  buying  goods  at  wholesale,  and  then  by  the  wholesale 
merchant  in  buying  goods  of  the  manufacturers,  and  then 
by  the  manufacturers  in  buying  materials,  and  then  by 
the  producers  of  materials  in  paying  wages  to  their  labor- 
ers.    It  is  clear  that  a  sum  of  money  always  taking  the 
short  circuit  could  do  much  more  buying  at  retail  than 
an  .equal  sum  that  should  always  take  the  long  one. 

(e)  To    all    except   the    last  receiver   (the   one   who 
spends  it)  the  money  may  represent  savings  to  be  used 
in  business  with  a  view  to  profit.     This  usually  requires 
some  consideration  and  planning.     Even  if  this  were  not 
so,  every  business  man  needs  to  keep  some  money  by 
him  to  meet  unforeseen  calls.    Each  must  therefore  hold 
the  money  he  receives  long  enough  to  keep  his  reserve 
of  cash   up  to  the  required  limit.     In  fact,  at  any  given 
moment,  the   money  of  the  world   is    mainly   held   by 

equivalent  of  every  other,  the  individual  pieces  of  money  may  ex- 
change places  freely  without  affecting  the  result.  In  fact,  the  very 
form  of  currency  used  in  retail  transactions  differs  from  that  chiefly 
used  in  wholesale  trade.  In  the  former,  notes  and  coins  are  used  for 
the  most  part,  whereas  the  larger  transactions  of  wholesale  trade  are 
settled  by  the  use  of  bank  deposits. 


Two  Functions  of  Money.  133 

business  men,  either  as  savings  awaiting  investment  (or 
re-investment)  or  as  reserve  funds  to  meet  emergencies. 

Even  those  persons  who  ordinarily  spend  their  whole 
income  do  not  part  with  all  the  money  they  receive  the 
very  day  they  receive  it.  They  must  ordinarily  reserve 
some  part  for  current  payments,  until  they  can  count  on 
receiving  more. 

(/)  It  is  to  be  noted  that  money  has  two  distinct 
functions  to  perform  in  its  circuit,  the  one  as  a  medium 
of  exchange,  the  other  as  a  vehicle  for  transmitting  un- 
invested savings  and  for  paying  wages.  It  is  highly 
important  to  keep  the  distinction  in  mind. 

The  consumer  who  pays  money  for  goods,  uses  it  simply 
as  a  medium  of  exchange.  The  dealer,  in  his  turn,  uses 
in  the  same  way  whatever  part  of  it  he  spends.  For 
him,  however,  the  sale  of  the  goods  is  the  close  of  an 
investment.  The  money  represents  savings,  now  in  the 
free  or  uninvested  state.  Much  the  greater  part  of  it 
he  must  use  over  again  in  his  business.  If  he  pay  it  as 
wages,  his  act  is  clearly  not  one  of  exchange.  If  he  use 
it  to  buy  new  goods  at  wholesale,  this  again  is  a  case  of 
investment  rather  than  of  economic  exchange.  He  gives 
free  savings  in  return  for  invested  savings.  The  same 
is  true  when  the  wholesale  merchant  buys  goods  of  the 
manufacturer.  By  these  transfers  the  savings  released 
from  investment  by  the  consumer's  purchases  at  retail, 
are  transmitted  to  the  producing  employers,  by  whom  they 
are  embarked  in  new  investments  through  payment  as 
wages.  In  the  hands  of  the  laborers  the  money  received 
as  wages  becomes  again  a  mere  medium  of  exchange. 


134 


Political  Economy. 


7.  Diagram  illustrating,  the    Circuits    made   by  Money 

in  the  ordinary  course  of  production  and  exchange. 


l5T"N   x^/^ 


&m 


\ 


EXPLANATIONS.  —  At  1  the  money  is  paid  for  consumable  com- 
modities at  retail;  at  2  it  is  paid  to  the  wholesale  dealers;  at  3 
to  the  producers  of  finished  commodities;  at  4  to  the  producers  of 
materials ;  and  at  5  to  the  producers  of  machinery.  The  dealers 
and  employers  spend  the  portions  of  a,  d,  g,  j\  and  q,  in  buying 
commodities  at  retail,  and  pay  as  wages  the  portions  i,  e,  //,  /, 
and  o.  (The  latter  include  salaries,  fees,  and  payments  for  non- 
productive services  as  well  as  savings  paid  to  productive  laborers. 
Money  paid  as  wages  passes  through  a  bulb.)  The  recipients  of 
the  wages  spend  the  portions  c,  /*,  i,  wz,  and  r,  in  buying  commodi- 
ties at  retail,  and  save  or  pay  as  wages  in  other  ways  the  portions 
//,  e',  h'j  I',  and  o'.  The  producers  of  materials  pay  the  portion  n 


Circuits  Made  by  Money.  135 

for  machinery ;  and  the  producers  of  machinery  the  portion  p  for 
materials. 

Everything  is  a  finished  commodity  in  the  sense  here  intended 
when  it  has  reached  the  condition  in  which  it  is  to  be  used  and 
enjoyed  as  a  reward  of  labor  or  waiting.  For  example,  coal  for 
house  use  is  a  finished  commodity,  even  though  coal  for  use  in  a 
factory  is  only  a  material.  The  arrows  outside  of  the  figure  are 
intended  to  indicate  the  return  movement  of  products  of  labor,  for 
which  the  money  is  paid,  — thus  the  one  at  the  tap  indicates  the 
movement  of  materials  and  machinery  to  the  producers  of  finished 
commodities ;  the  one  at  the  right  the  movement  of  finished  com- 
modities from  the  producers  to  the  wholesale  dealers,  etc. 

The  diagram  makes  no  pretence  of  giving  a  complete  picture 
of  industry,  or  of  including  all  the  movements  of  money.  For 
example,  speculative  trading  in  stocks,  bonds,  land,  etc.,  makes  a 
considerable  demand  on  the  currency  ;  but  it  may  be  regarded 
rather  as  keeping  a  certain  amount  of  money  out  of  use  in  pro- 
duction and  exchange  than  as  constituting  a  part  of  the  true 
circulation.  Again,  no  attempt  is  made  to  separate  payments  for 
transporting  goods  and  materials  from  other  payments  ;  though 
they  do  not  exactly  coincide  in  point  of  time  with  any  other  set 
of  payments,  we  may  perhaps  regard  them  as  included  in  the  dis- 
bursements at  wholesale.  Again,  no  account  is  made  of  the  les- 
sening of  industrial  incomes  by  taxes.  These  undoubtedly  lessen 
somewhat  the  rapidity  of  circulation  of  the  money  drawn  into 
public  treasuries ;  but  unless  taxes  be  excessive,  or  the  proceeds 
be  held  unduly  long,  the  proportion  of  the  general  circulation 
absorbed  by  them  is  small,  and  may  be  ignored. 

It  is  assumed  in  the  diagram  that  all  commodities  pass  through 
the  hands  of  one,  and  only  one,  wholesale  merchant.  In  fact,  of 
course,  many  products  are  sold  directly  to  the  retailer  by  the  pro- 
ducer, while  others  pass  through  the  hands  of  several  wholesale 
dealers.  Perhaps  the  two  errors  may  be  regarded  as  offsetting 
each  other,  so  far  as  the  rapidity  of  circulation  of  money  is  con- 
cerned. 


136 


Political  Economy. 


8.  Application  of  the  Foregoing  Principles.  —  Let  us 
now  suppose  the  currency  of  a  country  to  consist  of 
$150,000,000,  distributed  among  the  circuits  of  our  dia- 
gram as  indicated  in  the  following  table.  Assuming  for 
simplicity  that  each  receiver  of  money  holds  it  for  a 
week,  we  group  together  circuits  of  the  same  length. 


Returning  at 

Amount 
circulating. 

Circulating 
period. 

Corresponding  supply  of 
money  for  purchases 
at  retail  each  week. 

$10000000 

1  week. 

$10000000 

c  and  d     .    .    . 

24,000,000 

2  weeks. 

12,000,000 

&',  /,  and  g    .    . 

27,000,000 

3 

9,000,000 

ef,  i,  j,  and  q     . 

40,000,000 

4 

10,000,000 

h',  ra,  and  r  .    . 

25,000,000 

5       " 

5,000,000 

J'ando'    .    .    . 

18,000,000 

6 

3,000,000 

n  and  p    .     .    . 

6,000,000 

5,  6,  7    " 

(say)      1,000,0001 

$150,000,000 

$50,000,000 

The  weekly  output  of  consumable  commodities  offered 
at  retail  in  the  country  must,  under  these  conditions,  bear 
an  aggregate  price  of  about  $50,000,000.  This  will  deter- 
mine the  general  level  of  prices  in  the  country.  The  rela- 
tive cost  of  production  of  each  commodity  will,  of  course, 
determine  the  relative  price  of  each,  i.  e.,  its  value. 

If  the  amount  of  money  in  circulation  should  be  in- 
creased to  $200,000,000,  distributed  in  the  same  way, 
the  aggregate  price  of  each  week's  product  would  be 
1  Divided  between  j,  I,  o,  and  q. 


The  Cause  of  "  Dull  Times."  137 

raised  from  $50,000,000  to  $67,000,000.  If  each  re- 
ceiver of  money  should  come  to  hold  it,  on  an  average, 
one  day  longer,  the  aggregate  price  would  have  to  fall 
from  $50,000,000  to  about  $42,000,000. 

If,  the  supply  of  money  remaining  unchanged,  the 
aggregate  production  of  commodities  should  be  increased 
say  ten  per  cent.,  the  price  of  each  article  would  have 
to  be  lowered  roughly  ten  per  cent,  in  order  to  sell  the 
whole  product. 

The  money  transactions  of  a  commercial  country  are  of 
course  much  less  simple  and  uniform  than  our  diagram 
and  this  hypothetical  case  may  seem  to  imply.  But 
whatever  their  complexity,  they  are  governed  by  the 
same  general  principles  as  the  simple  case ;  the  supply 
of  money  offering  for  goods  has  the  same  dependence  on 
the  quantity  of  money  in  circulation,  and  the  rapidity  of 
circulation  of  the  different  portions. 

A  study  of  our  diagram  may  also  help  to  make  clear 
the  two  functions  of  money  (p.  133),  and  the  resulting 
connection  between  the  payment  of  wages  and  the  ex- 
change of  commodities.  If  anything  occurs  to  check 
the  payment  of  wages  at  b,  e,  h,  I,  or  o,  it  is  easy  to  see 
that  the  supply  of  money  offering  for  goods  at  1  must 
fall  off  in  consequence.  In  fact,  the  lessened  sales  to 
laborers  constitute  the  real  lessening  of  wages  in  such 
a  case.  The  situation  is  that  known  under  the  name 
of  "dull  times,"  or  a  depression  of  business. 

9.  Deficiency  of  Money  looks  like  an  Excess  of  Goods.— 
The  popular  explanation  of  a  business  depression  is  usually 


138  Political  Economy. 


that  too  many  commodities  are  produced.  The  appear- 
ance of  the  markets  certainly  favors  this  view.  There  is 
an  apparent  surplus  of  every  commodity  ;  a  real  surplus, 
if  one  can  be  imagined,  could  hardly  look  differently. 

But  those  who  regard  this  as  a  case  of  general  over- 
production are  misled  by  mere  appearances.  They  forget 
the  masses  of  people  who,  in  times  of  business  depres- 
sion, suffer  for  want  of  these  very  things  that  seem  to  be 
in  excessive  supply,  and  would  gladly  give  their  labor  in 
return  for  them. 

The  real  trouble,  at  such  a  time,  lies  in  the  hesitation 
of  business  men  as  to  the  investment  of  their  savings. 
The  money  and  substitutes  for  money  that  are  ordinarily 
paid  for  labor  as  rapidly  as  new  money  is  received,  are 
partly  allowed  to  lie  unused  in  the  banks.  The  result  is 
that  those  who  live  by  wages  are  unable  to  buy  as  freely 
as  usual.  The  circulation  of  money  is  checked. 

Just  why  business  men  are  more  perplexed  and  slower 
to  invest  at  some  times  than  at  other  times  is  a  question 
we  cannot  now  attempt  to  answer,  —  it  is  in  fact  a  most 
difficult  question.  Usually  these  periods  of  depression 
follow  periods  of  strong  confidence  and  prompt  invest- 
ment. The  change  from  brisk  times  to  dull  times  usually 
begins  with  the  failure  of  some  ill-judged  ventures  of  a 
speculative  character,  carried  on  by  means  of  borrowing 
and  other  forms  of  credit.  The  losses  caused  by  these 
failures  often  involve  sound  business  houses  in  disaster. 
In  consequence  of  them  trade  becomes  embarrassed,  and 
wide-spread  distrust  takes  the  place  of  over-confidence. 


Excess  of  Money  looks  like  a  Deficiency  of  Goods.     139 

The  real  trouble,  in  the  period  of  depression  which  fol- 
lows, is  not  a  general  excess  of  commodities  but  excessive 
caution  in  the  hiring  of  laborers.  Business  men  do  not 
invest  their  savings  in  new  enterprises  with  accustomed 
promptness  and  energy ;  the  result  is  that  many  laborers 
are  unemployed,  and  others  work  only  half-time.  The 
aggregate  money  income  of  those  who  live  by  wages 
being  reduced,  a  corresponding  reduction  takes  place  in 
their  usual  purchases  of  commodities.  Goods  lie  unsold 
on  the  hands  of  the  dealers.  There  are  not  too  many 
commodities,  but  there  are  too  many  commodities  unsold. 
There  is  a  deficiency  of  purchasing  power  on  the  part  of 
the  usual  buyers. 

The  true  remedy  would  be,  not  to  lessen  the  world's 
supply  of  good  things  (of  which  we  always  have  too 
few),  but  to  restore  the  purchasing  power  of  the  wage- 
earners.  This  could  be  done  either  by  restoring  to  the 
old  amount  the  payments  of  money  to  laborers ;  or  by 
reducing  the  prices  of  commodities  in  the  same  ratio 
as  the  money  income  of  the  laboring  class  has  been 
diminished. 

But  the  first  remedy  is  out  of  the  question  until  the 
congestion  of  the  market  shows  signs  of  lessening ;  and 
the  second  is  naturally  resisted  by  holders  of  goods,  since 
it  seems  to  involve  a  loss  of  their  profits.  A  business 
depression  is  therefore  an  awkward  dilemma.  It  lasts 
usually  until,  partly  by  fall  of  prices  and  partly  by  re- 
stricted production,  the  aggregate  prices  of  the  goods  for 
sale  come  to  match  the  money  in  circulation. 


140  Political  Economy. 


10.  Excess  of  Money  looks  like  a  Deficiency  of  Goods.— 
When  for  any  reason  the  supply  of  money  exceeds  the 
demand  for  it,  we  have  the  opposite  effect  to  that  just 
considered.  The  readiness  of  most  persons  to  buy  is 
limited  only  by  their  means  of  purchase.  In  the  case 
we  are  now  considering  the  money  income  of  the  mass 
of  men  has  been  increased.  Their  purchasing  power 
exceeds,  at  previous  prices,  the  forthcoming  supply  of 
commodities.  The  stocks  of  commodities  for  sale  be- 
come daily  lessened,  because  people  buy  faster  than  new 
goods  are  produced.  There  is  apparently  a  deficient  pro- 
duction of  all  things. 

This  situation  lasts  but  little  time  in  comparison  with 
that  in  which  money  is  deficient.  Men  are  slow  and 
reluctant  to  lower  their  prices,  but  they  are  very  prompt 
to  raise  them  when  opportunity  offers.  When  the  sup- 
ply of  money  is  increased  its  value  soon  falls.  This  case 
attracts  little  attention  because  it  is  of  brief  duration.  It 
regularly  appears  after  a  depression  of  business,  when  the 
money  and  substitutes  for  money 'that  have  been  held 
back  during  the  "  dull  times "  are  once  more  put  into 
active  circulation  by  being  used  in  hiring  laborers,  or  in 
purchasing  products  of  labor  from  those  engaged  in  pro- 
duction. It  also  appears  whenever  new  discoveries  of 
gold  add  to  the  local  supply  of  money,  and  when  addi- 
tions are  made  to  the  bank  currency  of  any  country. 


CHAPTER  XIV. 

PRODUCTION   OP   THE   PRECIOUS    METALS. 

1.  Dependence  of  Prices  on  Quantity  of  Currency. — All 
that  now  remains  to  be  done  in  order  to  complete  our 
study  of  prices,  or  the  value  of  money,  is  to  consider 
how  the  quantity  of  money  in  circulation  is  determined. 
The  goods  needing  to  be  sold  constitute  the  demand  for 
money.  The  supply  depends  on  the  quantity  circulating, 
and  the  rapidity  of  its  circulation.  We  have  seen  that 
the  business  arrangements  and  habits  of  each  country 
determine  the  rapidity  of  circulation  of  its  money.  Our 
remaining  question,  then,  is,  What  determines  the  quan- 
tity of  money  ? 

The  question  of  quantity  brings  us  at  once  to  the 
source  of  money.  The  gold  and  silver  of  which  all  our 
true  money  consists,  are  products  of  human  labor.  The 
quantity  of  them  produced  must  therefore  depend  in  the 
long  run  on  the  principles  laid  down  in  Chapter  XI. ; 
that  is  to  say,  men  can  be  counted  on  to  produce  as 
much  of  them  as  there  is  a  demand  for  at  the  natural 
value. 

But  here  we  are  met  by  a  familiar  fact  which  makes 
the  application  of  ordinary  principles  much  less  obvious 
in  the  case  of  money  than  in  any  other  case.  The  de- 

HI 


142  Political  Economy. 

maud  for  money  being  at  bottom  a  demand  for  other 
things,  it  is  satisfied  with  any  representative  of  true 
money  that  will  answer  the  real  object  in  view.  We  all 
know  that,  in  point  of  fact,  people  in  this  country  use 
hardly  any  gold  coin  in  ordinary  business,  and  not  much 
silver  beyond  the  amount  necessary  for  small  change. 
We  use  instead  mere  promises  to  pay  coin,  and  rights  to 
demand  coin,  supplied  to  us  by  the  banks  and  by  the 
Treasury  of  the  United  States.1 

So  far  then  as  our  prices  depend  on  the  quantity  of 
money  in  circulation,  they  depend  on  the  quantity  of  this 
Bank  Currency,  as  we  may  conveniently  call  it.  This 
exceeds  very  much  the  total  quantity  of  coin  in  the 
country.  Yet  each  dollar  of  it  purports  to  represent  a 
dollar  of  true  money ;  it  gives  the  holder  an  unques- 
tioned right  to  get  a  dollar  of  coin  if  he  wishes  it;  so 
that  its  quantity  must  stand  in  some  definite  relation 
to  the  quantity  of  coin. 

2.  Nominal  and  Real  Demand  and  Supply  of  Money.— 
The  fact  is  that,  in  the  case  of  money,  there  is  a  nominal 
demand  far  exceeding  the  real  demand,  and  a  nominal 
supply  far  exceeding  the  real  supply.  The  nominal  de- 
mand consists  of  all  the  goods  needing  to  be  sold ;  the 
real  demand  is  limited  to  the  amount  requisite  for  main- 
taining confidence  in  the  bank  currency  with  which  in 
practice  exchange  of  products  is  mainly  carried  on.  On 
the  side  of  supply,  the  nominal  stock  of  coin  is  as  great 

1  For  the  present  purpose  we  may  regard  the  Treasury  as  simply  a 
great  bank  issuing  promises  to  pay  coin  on  demand. 


Value  of  Precious  Metals  not  Due  to  Coinage.     143 

as  the  whole  mass  of  coin  and  rights  to  call  for  coin 
which  constitute  the  active  currency ;  the  real  stock  is 
the  far  smaller  amount  held  as  reserves  for  redeeming  the 
bank  currency,  plus  the  coin  in  actual  circulation. 

The  question  of  prices,  then,  so  far  as  it  is  a  question 
of  the  quantity  of  money,  has  two  distinct  branches: 
first,  What  determines  the  actual  stock  of  coin  ?  and  sec- 
ondly, What  settles  the  proportion  between  bank  cur- 
rency or  the  nominal  stock  of  coin  and  the  real  stock  ? 
The  first  of  these  questions  relates  to  the  production  of 
the  money-metals.  The  second  involves  some  elementary 
principles  of  banking.  Both  must  be  studied  in  order  to 
understand  how  the  value  of  money  is  governed. 

3.  The  Value  of  the  Precious  Metals  not  due  to  Coin- 
ing. —  It  is  necessary  to  observe  at  the  outset,  that  gold 
and  silver  have  other  uses  besides  serving  as  money. 
They  have  long  been  highly  prized  by  all  nations  as 
material  for  jewelry  and  other  ornaments,  plate,  watch- 
cases,  etc.  In  fact,  it  was  the  high  value  attached  to 
them  for  these  purposes  that  made  them  specially  suit- 
able for  use  as  money.  No  substance  could  be  generally 
used  as  money  if  it  were  not  generally  regarded  as  use- 
ful or  desirable  in  itself.  In  payments  between  men  of 
different  nations  it  would  not  be  accepted.  Further, 
even  for  use  in  any  one  country,  it  would  be  defective  as 
money,  because  it  would  lack  one  of  the  most  important 
influences  in  steadying  the  value  of  gold  and  silver ;  any 
decline  of  their  value  calls  out  an  increase  of  demand  for 
them  in  the  arts,  thus  checking  the  fall 


144  Political  Economy. 

Gold  and  silver  were  used  as  money  before  mints  and 
coining  were  introduced,  and  before  there  were  any  laws 
on  the  subject  of  money.  It  is  still  one  of  their  chief 
recommendations  that  their  value  as  coin  is  independ- 
ent of  the  mint-mark  they  bear.  The  mere  coining  adds 
nothing  to  their  value.  The  coins  may  be  defaced  or  even 
melted  back  into  bullion  without  loss  of  value.  In  fact, 
coins  are  constantly  melted  down  for  use  in  the  arts,  just 
as  if  they  were  mere  bullion.1 

In  old  times  gold  and  silver  passed  by  weight.  The 
name  of  the  English  "  pound "  sterling,  although  it  has 
now  become  a  mere  name,  is  a  standing  reminder  of  the 
way  in  which  our  early  ancestors  used  silver  as  money. 
One  is  apt  to  forget  that  the  money-metal  of  our  own 
day  still  passes  by  weight,  though  we  seem  only  to  count 
it  as  dollars.  The  weighing  is  done  once  for  all  at  the 
mints.  The  name  and  other  marks  stamped  on  each 
piece  are  merely  ready  proof  that  it  contains  a  certain 
quantity  of  metal.  This  is  the  advantage  of  coining,  that 
it  saves  us  all  trouble  as  to  weighing,  and  gives  us  the 
gold  and  silver  in  pieces  of  uniform  size,  thus  avoiding 
troublesome  fractions  in  the  reckoning. 

The  coinage  laws  of  each  country  fix  the  weights  and 
names  of  its  coins.  As  to  the  exchange  value  of  the 
eagle,  or  the  sovereign,  or  the  franc,  after  it  is  coined, 

1  These  statements  assume  unrestricted  coinage.  Of  course,  no 
silversmith  would  think  of  using  our  present  silver  coins  as  mere 
silver;  he  can  buy  the  silver  contained  in  a  dollar  piece  for  about 
seventy  or  seventy -five  cents.  They  are  all  mere  "  tokens,"  and  the 
coinage  of  them  is  strictly  limited.  See  Chapter  XVI. 


Production  of  Gold  and  Silver.  145 

that  is  a  matter  over  which  the  coinage  laws  can  have 
no  control,  since  it  depends  on  the  prices  of  goods,  and 
these  no  statute  attempts  to  regulate. 

4.  The  Production  of  Gold  and  Silver  —  The  production 
of  the  precious  metals  seems  to  be  in  some  respects  differ- 
ent from  ordinary  industries.  The  labor  required  in  the 
production  of  all  minerals  is  largely  that  of  mere  search 
for  the  natural  deposits  of  them.  This  seems  to  be  spe- 
cially true  of  gold  and  silver.  They  are  seldom  found  in 
very  extensive  deposits,  as,  for  example,  coal  and  iron  are 
found.  They  are  found  rather  in  scattered  washings, 
veins  and  "  pockets,"  often  of  great  richness,  but  usually 
of  limited  extent.  The  search  for  these  is  always  more 
or  less  of  a  lottery,  and  as  a  result  the  output  at  any  one 
source  is  more  variable  than  in  other  mining  industries. 
Where  so  much  depends  on  luck  and  on  chance  discov- 
ery, it  may  seem  unreasonable  to  speak  of  any  connection 
between  the  value  of  the  precious  metals  and  their  cost  of 
production.  Yet  there  is  undoubtedly  a  connection.  It  is 
the  high  value  of  gold  and  silver  that  impels  men  to  search 
for  them.  Every  fall  of  their  value  abates  something  of 
the  zeal  in  discovery ;  every  rise  increases  it. 

Again,  although  the  result  of  one  man's  labor  for  a  day 
or  a  week  is  very  uncertain,  the  average  product  of  the 
labor  of  many  men  is  less  so.  Much  depends  on  chance 
"  finds  "  from  day  to  day,  but  apart  from  great  discoveries 
these  average  themselves  in  the  general  result  for  periods 
of  considerable  length.1 

1  Notwithstanding  local  variations,  the  total  yearly  product  of  gold 
for  the  whole  world  has  been  remarkably  steady  of  late,  being  esti- 


146  Political  Economy. 


Men  go  into  the  production  of  gold  and  silver  as  they 
go  into  fishing  and  other  uncertain  pursuits,  because  they 
think  that,  taking  good  and  bad  luck  together,  men  do  as 
well  in  that  as  in  other  things.  Even  allowing  much  for 
the  spirit  of  gambling,  which  undoubtedly  plays  an  active 
part,  there  is  enough  of  business  principle  in  the  produc- 
tion of  gold,  and  silver  to  keep  their  value  roughly  under 
the  control  of  ordinary  rules.  When  the  profits  of  gold 
and  silver  mining  are  on  the  whole  high,  men  will  be 
attracted  into  the  industry ;  when  they  are  low,  men  will 
seek  other  industries  in  preference.2 

There  are  two  sets  of  changes  occurring  from  time  to 
time  in  the  cost  of  producing  gold  and  silver,  and  there- 
fore changing  the  quantity  of  them  produced.  The  first 
of  these  relates  to  the  sources  of  the  metals.  The  dis- 
covery of  new  and  more  productive  mines  may  greatly 
increase  the  yield  for  a  given  amount  of  labor.  When 

mated  at  a  little  less  than  five  million  ounces.  The  production  of 
silver  is  much  less  steady,  and  is  estimated  to  be  about  twenty  times 
as  great  as  that  of  gold,  —  one  hundred  and  one  million  (101,000,000) 
ounces  in  1886.  Much  of  the  silver  is  obtained  as  a  by-product  in  the 
mining  of  lead,  copper,  and  some  other  metals. 

2  It  is  necessary  to  bear  in  mind  the  precise  way  in  which  a  general 
rise  or  a  general  fall  of  prices  changes  the  earnings  of  the  gold-miners. 
The  money-metal  of  a  country  has  itself  no  real  price.  If  coinage 
be  unrestricted,  an  ounce  of  the  metal  will  always  sell  for  the  amount 
of  coin  it  will  make.  But  when  the  product  of  the  mines  is  coined, 
it  is  obvious  that  the  quantity  of  ordinary  commodities  the  miners 
can  get  for  their  labor  will  depend  on  the  general  level  of  prices. 
A  rise  of  prices,  therefore,  makes  it  harder  to  get  commodities  by 
digging  gold. 


Stock  of  Precious  Metals  slow  to   Change.         147 

discoveries  of  this  kind  are  made  on  a  great  scale,  as 
happened  in  the  case  of  gold  in  1848  and  1849,  and  in 
the  case  of  silver  in  1875,  the  annual  output  is  enor- 
mously increased.  On  the  other  hand,  the  exhaustion  of 
a  part  of  the  known  sources  may  diminish  to  an  indefinite 
extent  the  current  production. 

The  other  set  of  changes  are  connected  with  the  mode 
of  extracting  the  metals  from  the  foreign  substances  with 
which,  in  their  native  beds,  they  are  mixed  or  chemically 
combined.  The  process  of  extraction  was  formerly  labori- 
ous, and  therefore  costly.  It  has  now  been  much  cheap- 
ened, and  may  be  further  cheapened  by  new  inventions. 
The  immediate  effect  of  these  improvements  is  less  strik- 
ing than  that  resulting  from  great  discoveries  of  gold  and 
silver,  but  in  the  long  run  their  influence  on  the  product 
may  be  as  great.  They  make  the  output  of  every  mine 
greater  than  before.  They  make  it  possible  to  resume 
the  working  of  mines  that  were  formerly  abandoned  as 
unprofitable :  of  such  there  are  many  in  different  parts 
of  the  world.  Even  the  refuse  of  former  mining  is  now, 
in  many  cases,  worked  over  again  with  a  profit. 

5.  The  Stock  of  the  Precious  Metals  slow  to  Change.  — 
While  the  production  of  gold  and  silver  is  subject  to 
greater  variations  than  that  of  most  other  things,  the 
total  available  supply  of  them  is  much  less  variable  than 
that  of  most  other  things.  This  is  a  fact  of  great  im- 
portance in  relation  to  the  value  of  money.  It  is  due 
primarily  to  the  good  care  men  take  of  gold  and  silver, 
especially  the  former.  Gold  is  not  put  to  rough  uses  as 


148  Political  Economy. 

the  baser  metals  are,  and  worn  out  or  destroyed;  it  is 
mostly  treasured  and  kept.1 

The  result  is  that  the  world  has  now  accumulated  a 
great  stock  of  gold,  —  in  comparison,  that  is,  with  the 
amount  produced  from  year  to  year.  A  good  part  of 
the  gold  on  hand  at  present  was  produced  centuries  ago ; 
comparatively  little  of  it  is  of  recent  production.  It  is 
estimated  that  the  stock  on  hand  is  at  least  a  hundred 
times  as  great  as  the  average  yearly  product. 

It  follows  that  the  fluctuations  of  the  yearly  product 
have  little  effect  on  the  total  stock.  If  all  the  gold- 
mines in  the  world  were  closed  for  a  year,  there  would 
be  no  unusual  scarcity  of  gold.  If  they  should  all 
double  their  yield  for  a  year  the  increase  of  gold  would 
hardly  be  appreciable.  The  difference,  either  way,  would 
not  exceed  one  or  two  per  cent,  of  the  total  quantity  on 
hand. 

In  the  case  of  most  other  things  the  whole  stock  on 

1  Of  course  gold  is  not  wholly  exempt  from  destructive  uses. 
Watch-cases,  jewelry,  etc.,  are  subject  to  some  wear  and  tear,  al- 
though the  gold  they  contain  is  mainly  saved  and  used  over  again.  The 
gold  used  in  gilding  and  plating,  dentistry,  etc.,  is  almost  wholly  lost 
to  the  supply.  The  wear  and  tear  of  gold  in  the  coinage  is  very  slight. 
As  used  in  the  United  States,  to  form  reserves  for  the  Treasury  and 
the  banks,  there  is  no  reason  why  gold  coins  should  not  last  thousands 
of  years. 

Silver,  being  only  about  one  twentieth  part  as  costly  as  gold,  is 
applied  to  rough  and  destructive  uses  much  more  freely  than  gold,  and 
is  accordingly  consumed  much  more  quickly.  Even  in  the  form  of 
coin,  silver,  being  used  as  change,  is  put  to  a  rougher  use  and  is  worn 
out  more  quickly  than  gold. 


Stock  of  Precious  Metals  slow  to  Change.         149 

hand  is  of  recent  origin,  partly  because  they  are  in  them- 
selves perishable,  but  more  commonly  because  they  are 
put  to  uses  that  destroy  them,  or  soon  wear  them  out. 
If  the  production  of  iron,  or  of  coal,  or  of  wool  were  to 
cease  for  a  year,  there  would  be  a  dreadful  dearth  of  it ; 
if  the  production  were  doubled  the  stock  for  sale  would 
be  doubled  also.  We  can  readily  see  that  the  effect  of 
the  change  on  the  values  of  these  products  would  be 
vastly  greater  than  the  effect  of  a  similar  change  in  the 
production  of  gold  on  the  value  of  that  metal. 


CHAPTEE   XV. 

BANK    CURRENCY. 

1.  Bank  Currency  More  Convenient  than  Coin.  —  Gold 
and  silver  coins  are  highly  useful  and  even  necessary,  but 
they  are  inconveniently  heavy  for  carrying  in  one's 
pocket.1  It  was  natural  that  civilized  men  should  in- 
vent a  plan  for  using  mere  titles  to  coin,  or  ready  evi- 
dence of  ownership  in  coin,  while  keeping  the  actual  gold 
and  silver  stored  in  a  few  safe  places  where  they  could  be 
readily  obtained  by  any  person  holding  the  right  to  call 
for  them.  Sensible  men  would  have  been  glad  to  pay 
something  for  the  advantages  of  such  an  arrangement. 

It  is  the  great  discovery  of  modern  Banking  that  a 
very  admirable  arrangement  of  this  kind  can  be  supplied 
to  us  free  of  charge,  while  those  who  perform  the 
gratuitous  service  make  a  handsome  profit  from  it. 

The  secret  of  banking  profits  is  that,  for  ordinary  pur- 
poses, people  like  the  right  to  get  coin  better  than  coin 
itself.  We  need  only  a  simple  way  of  passing  the  right 
from  man  to  man  just  as  we  should  pass  coin.  Bankers 
have  supplied  us  with  two  very  simple  devices  for  doing 
this,  namely,  Bank  Notes  and  Checks.  The  two  differ  in 
several  important  respects,  but  they  are  alike  in  this  es- 

1  Two  hundred  dollars  in  gold  weigh  nearly  a  pound  (Troy)  ;  the 
same  amount  in  silver  dollars  weighs  over  fourteen  pounds. 
150 


Bank  Currency.  151 


sential  point,  that  the  effect  of  each  when  used  in  making 
a  payment,  is  to  transfer  from  one  person  to  another  the 
right  of  demanding  coin  from  a  bank.  Their  differences 
arise  from  a  difference  in  the  form  of  holding  the  right. 

2.  Two  Forms  of  Bank  Currency :  Notes  and  Deposits.  — 
A  bank-note  is  itself  a  proof  of  the  holder's  claim  upon 
the  bank,  as  well  as  an  instrument  for  transferring  it. 
The  holder  of  a  deposit  has  no  such  ready  evidence  of  his 
right.  His  name,  with  the  amount  of  the  deposit  stand- 
ing to  his  credit,  is  written  in  the  ledger  of  the  bank ;  but 
he  has  in  his  own  hands  no  evidence  of  the  fact.  If  he 
wishes  to  transfer  any  part  of  his  right  to  another  in 
payment  for  goods  or  services,  he  must  write  out  an 
order,  called  a  check,  directing  the  bank  to  make  the 
desired  payment  on  his  behalf. 

The  receiver  of  the  check  has  no  guarantee,  except 
the  character  of  the  giver,  that  the  deposit  exists.  For 
use  between  strangers,  therefore,  and  between  persons 
who  have  not  confidence  in  each  other's  honor,  the 
depositor's  right  is  much  less  convenient  than  the  note- 
holder's. The  same  is  true  of  persons  living  at  a  distance 
from  banks. 

The  note  circulates  as  readily  as  coin  wherever  the 
rights  given  by  the  bank  issuing  it  form  part  of  the  cur- 
rency. For  these  reasons  the  note  is  much  more  used  in 
retail  trade  than  the  deposit,  since  in  retail  transactions 
the  buyer  and  seller  are  seldom  acquainted  with  each 
other.  Besides  this,  the  transactions  are  mostly  too  small 
in  amount  to  make  it  worth  while  to  write  out  checks. 


152  Political  Economy. 

On  the  other  hand,  it  is  much  safer  to  have  a  deposit 
to  one's  credit  at  a  bank  than  to  keep  bank-notes  in 
one's  pocket  or  drawer.  Notes  are  exposed  to  all  the 
risks  that  coin  would  be  exposed  to:  they  may  be  lost,  or 
stolen,  or  destroyed  by  fire,  and  the  loss  of  the  note  means 
the  loss  of  the  right  it  gave.  The  deposit  is  safe  from 
these  and  all  other  dangers  except  the  failure  of  the  bank. 
For  men  whose  money  transactions  are  large  this  is  a  de- 
cisive point  in  favor  of  the  deposit  rather  than  the  note. 
The  deposit  liabilities  of  the  banks  in  this  country  are 
several  times  greater  in  amount  than  their  outstanding 
notes. 

It  is  important  to  see  clearly  that  the  proportion  of 
bank  currency  held  in  each  form  is  purely  a  matter  of 
convenience  for  the  holders,  and  is  entirely  in  their  con- 
trol, unless  hampered  by  legal  restrictions.  The  holder 
of  notes  can  at  any  time  convert  his  right  into  the  other 
form  by  simply  "  depositing "  them  to  his  credit.  The 
retail  merchant  does  this  daily  with  the  notes  received 
for  his  goods. 

The  holder  of  a  deposit  can  with  equal  readiness  ex- 
change it  for  notes  by  simply  presenting  his  check  and 
taking  notes  in  "payment."  In  fact,  the  two  forms  are 
freely  interchanged  day  by  day  to  suit  the  convenience 
of  individual  holders.  In  ninety-nine  cases  out  of  a 
hundred,  what  is  popularly  called  "  getting  a  check 
cashed  "  consists  in  getting  a  depositor's  right  to  demand 
coin  converted  into  a  note-holder's  right  to  do  the  same 
thing.  To  the  bank  it  is  a  matter  of  indifference  which 


Bank  Currency.  153 


form  of  right  the  holder  chooses.  The  effect  on  prices, 
or  the  value  of  money,  is  also  the  same  in  either  case. 

When  a  check  is  presented  for  payment,  the  person 
presenting  it  usually  wishes  not  so  much  coin  as  pocket- 
money.  For  this  purpose  well  secured  bank-notes  have 
everything  to  recommend  them ;  they  are,  in  fact,  the 
pocket  form  of  bank  currency.  The  admirable  notes  of 
our  own  national  banks  are  as  readily  current  as  coin 
in  every  part  of  the  Union.  No  person  would  think  of 
declining  them  in  payment  of  a  check,  unless  he  hap- 
pened to  need  money  for  use  outside  the  limits  of  the 
United  States. 

In  the  home  trade  of  a  country,  such  notes  answer 
perfectly  well  as  a  reserve  for  paying  deposits.  So  long 
as  they  are  convertible  into  coin,  on  demand,  the  whole 
currency  is  kept  on  the  coin  basis.  It  has  therefore 
been  thought  advisable,  in  most  countries,  to  guard  care- 
fully by  law  the  issue  of  notes ;  whereas,  the  use  of  de- 
posits and  checks  has  been  left  without  legal  restriction, 
except  in  the  case  of  our  own  national  banks. 

3.  The  Source  of  Banking  Profits,  —  The  profits  of 
banking  are  due  to  the  fact  that  very  few  of  the  persons 
who  get  the  right  to  demand  coin  ever  exercise  their 
right.  The  mere  title  to  coin  being  the  most  convenient 
currency  for  practical  use,  the  banks  can  safely  count 
on  having  but  few  calls  for  actual  coin.  So  long  as  there 
is  general  confidence  in  their  ability  to  meet  all  their 
liabilities  promptly  and  fully,  they  can  safely  bind 
themselves  to  pay  on  demand  a  much  larger  amount 
of  coin  than  they  have  actually  on  hand. 


154  Political    Economy. 

This  is  the  reason  why  bank-notes  and  deposits  affect 
the  value  of  money.  By  using  these  as  currency,  each 
dollar  of  coin,  while  itself  reposing  in  the  bank-vaults, 
is  made  to  do  the  work  of  several  dollars.  The  active 
supply  of  money  offering  for  goods  becomes  in  effect  as 
great  as  the  supply  of  these  rights  to  call  for  money. 
The  rights  are  for  the  most  part  purely  nominal  no  doubt : 
any  attempt  to  enforce  all  of  them  simultaneously  would 
show  this ;  but  their  effect  on  prices  is  just  as  great  as 
if  each  dollar  of  them  were  a  dollar  of  real  money. 

If  the  banks  were  required  to  keep  always  on  hand 
as  much  coin  as  they  bind  themselves  to  pay  on  demand, 
notes  and  deposits  would  have  no  effect  on  prices,  and 
there  would  be  no  profit  in  banking.  The  gold  and 
silver  "certificates"  issued  by  our  Treasury  furnish  a 
good  illustration  of  this :  the  full  amount  of  coin  they 
represent  is  required  by  law  to  be  kept  in  the  Treasury 
for  redeeming  them.  The  issuing  of  them  is  therefore 
a  burden  rather  than  a  source  of  profit;  and  they  add 
nothing  to  the  volume  of  the  currency,  since  they  only 
take  the  place  of  the  same  amount  of  coin. 

On  the  other  hand,  the  United  States  notes  (or 
greenbacks)  are,  in  this  respect,  a  true  bank  currency. 
There  are  three  hundred  and  forty-six  millions  of  dol- 
lars ($346,000,000)  authorized  to  be  issued,  and  the 
amount  of  coin  required  by  law  to  be  kept  for  redeem- 
ing them  is  only  one  hundred  millions. 

4.  The  Limit  of  Bank  Currency.  —  Banks  are  primarily 
great  lending  institutions.  Their  profits  come  to  them  in 


Bank  Currency.  155 


the  form  of  interest  on  loans  made  to  business  men. 
They  lend,  not  actual  money,  or  coin,  but  the  right  to 
call  on  them  to  pay  coin.  The  borrower  is  credited  with 
a  deposit  to  the  amount  of  his  loan  (or  takes  the  bank's 
notes  if  more  convenient),  and  the  bank  receives  interest 
on  that  amount  quite  as  if  it  had  given  him  real  money. 

Of  course  every  such  loan  increases  the  bank's  liability 
to  pay  real  money.  The  loan  at  once  becomes  currency, 
for  the  borrower  soon  turns  over  his  deposit-right  (or  the 
notes)  to  other  men,  some  of  whom  may  find  actual  coin 
more  convenient  for  their  purposes  than  the  right  to  call 
on  that  particular  bank  for  coin.  The  bank  must  there- 
fore be  on  its  guard  against  giving  men  the  right  to 
demand  coin  more  freely  than  the  amount  of  coin  it 
has  on  hand  clearly  warrants.  Any  overstraining  of  its 
credit,  any  whisper  of  a  doubt  as  to  its  ability  to  meet 
all  calls  promptly  and  easily,  would  be  quite  sure  to 
injure  its  business  and  might  even  cause  a  "  run  "  on  the 
part  of  those  holding  rights  to  demand  money  from  it. 

The  limit  of  safety  for  the  bank  itself  is  therefore  the 
only  necessary  limit  to  its  power  of  swelling  the  currency 
by  the  issue  of  notes  and  the  granting  of  loan-deposits. 
But  what  is  the  limit  of  safety  for  the  bank  ? 

This  is  a  question  to  which  no  very  definite  answer 
can  be  given.  There  is  no  one  rule  good  for  all  cases. 
Much  depends  on  the  nature  of  the  bank's  business,  the 
character  of  the  people  who  hold  rights  against  it,  and 
especially  on  the  strength  of  the  public  confidence  in 
the  management  of  the  bank's  affairs.  Each  bank  must 


156  Political  Economy. 

therefore  judge  by  its  own  experience  where  the  danger- 
line  begins. 

The  most  common  occasion  for  the  demand  of  true 
money  instead  of  bank  currency  is  connected  with  the 
external  trade  of  each  country  and  region.  Bank  cur- 
rency has  a  limited  area  of  circulation,  particularly  the 
part  of  it  that  consists  of  deposit-rights  to  demand 
money.  When  any  holder  of  such  a  right  wishes  to  use 
it  in  making  a  payment  at  a  distance,  there  is  always 
a  strong  chance  that  real  money  will  have  to  be  sent. 

Now  an  increase  of  bank  currency  in  any  region  causes 
an  increased  demand  for  goods.  More  things  than  usual 
are  brought  in  from  other  places,  and  money  has  to 
be  sent  out  to  pay  for  them.  The  banks  are  called  on  for 
coin,  in  such  a  case,  by  those  holders  of  bank  currency 
who  have  the  outside  payments  to  make.  For  this 
reason  the  banks  at  the  great  centres  of  foreign  trade  in 
each  country  need  to  carry  a  strong  cash  reserve. 

5.  Bank  Currency  of  the  United  States.  —  We  have 
now  four  kinds  of  circulating  notes  in  use:  1.  United 
States  Notes  or  Greenbacks  (known  also  as  legal-tender 
notes,  from  the  fact  that  they  are  "lawful  money  and 
a  legal  tender ; "  the  other  notes  have  not  this  quality). 
2.  Gold  Certificates.  3.  Silver  Certificates.  4.  National 
Bank  Notes. 

The  first  three  of  these  classes  are  issued  by  the  Treas- 
ury. They  differ  in  that  the  notes  are  simple  promises 
made  by  the  United  States  to  pay  to  any  person  present- 
ing them  for  redemption,  the  amount  of  money  named 


Bank  Currency.  157 


in  each ;  whereas  the  certificates  certify  that  the  amount 
of  gold  or  silver  named  in  each  has  been  deposited  in 
the  Treasury,  and  will  be  paid  to  any  person  presenting 
the  certificate  and  demanding  delivery  of  the  coin.  The 
notes,  as  stated  above,  are  supported  by  a  reserve  of  one 
hundred  millions  in  gold ;  the  certificates,  as  their  form 
implies,  are  covered,  dollar  for  dollar,  by  gold  and  silver 
coin  on  deposit  in  the  Treasury. 

For  the  circulating  notes  issued  by  the  national  banks 
no  specific  reserve  is  required  by  law.  They  are  amply 
secured  by  a  pledge  of  United  States  bonds  deposited  in 
the  Treasury  by  the  banks,  and  each  bank  is  required 
to  keep  the  Treasury  supplied  with  lawful  money  to  the 
extent  of  five  per  cent,  of  its  outstanding  notes.  Out  of 
the  fund  thus  provided,  the  Treasury  pays  lawful  money 
(i.  e.,  gold,  silver  dollars,  or  greenbacks)  for  all  national 
bank  notes  presented  for  redemption. 

As  to  the  deposit  portion  of  our  currency,  the  Acts  of 
Congress  draw  a  distinction  between  national  banks  in 
the  leading  cities  and  those  in  the  rest  of  the  country. 
City  banks  are  required  to  limit  their  deposit  liabilities 
to  a  hundred  dollars  for  every  twenty -five  dollars  of 
lawful  money  held  as  reserve :  whereas  the  so-called 
"  country-banks  "  are  allowed  to  owe  depositors  a  hundred 
dollars  for  every  fifteen  dollars  they  hold  as  reserve.1 

Taking  the  bank  currency  of  the  United  States  as  a 

1  It  ought  to  be  added  that  the  country  banks  make  little  or  no  use 
of  their  special  privilege.  They  keep,  on  the  average,  about  as  strong 
reserves  as  the  city  banks. 


158  Political  Economy. 

whole,  but  omitting  private  and  state  banks,  we  find  that 
at  the  middle  of  the  year  1879  (the  first  year  in  which 
our  present  system  existed  on  a  coin  basis)  the  propor- 
tion of  bank  currency  to  coin  was  a  little  less  than  eight 
dollars  for  one.  In  1887  the  ratio  had  fallen,  by  reason 
of  the  increase  of  coin  in  the  Treasury  and  the  national 
banks,  to  about  six  dollars  for  one.  But  the  aggregate 
bank  currency  of  the  country  is  rapidly  increasing,  and 
seems  likely  to  reach,  before  many  years,  a  proportion 
to  the  coin  reserve  not  much  below  that  of  1879.1  The 
note  circulation,  it  is  true,  is  decreasing;  by  reason  of 
the  high  price  of  United  States  bonds,  which  have  to  be 
placed  in  the  Treasury  as  a  security  for  notes  issued,  the 
banks  find  the  issue  of  notes  less  profitable  than  the 

1  The  figures  for  the  years  1879  and  1887  were  as  f olio ws,  —  not 
including  notes  in  the  Treasury  and  in  the  banks  : 

1879 

Net  Gold  in  the  Treasury.  $135,000,000    U.  S.  Notes  in  hands  of  public,  f  265,000,000 
"        "      "  Nat.  Banks.      21,000,000    Nat.  Bk.  "     "      "       "       "        295,000,000 

Deposits  of  Nat.  Banks    .    .       650,000,000 

TOTAL $156,000,000      • 

TOTAL $1,210,000,000 

1887 

Net  Gold  in  the  Treasury.  $188,000,000    U.  S.  Notes $250,000.000 

"       "     Nat.  Banks  .    .    152,000,000    Silver  Certificates     ....  150,000,000 

Nat.  Bank  Notes 250,000,000 

TOTAL $340,000,000    Deposits  of  Nat.  Banks      .     .  1,350,000,000 

TOTAL $2,000,000,000 

I  include  the  silver  certificates  among  the  circulating  notes,  but  do 
not  include  in  the  coin  reserve  the  two  hundred  and  twenty  million 
of  silver  dollars  ($220,000,000)  in  the  Treasury.  The  reason  is  that 
thus  far  the  silver  dollars  have  strictly  nothing  to  do  with  the  value  of 
the  certificates.  See  Chapter  XVI.,  §  9, 


Bank  Currency.  159 


granting  of  the  right  to  call  on  them  for  money  by  check. 
Accordingly,  deposits  increased  from  about  six  hundred 
million  dollars  ($600,000,000)  at  the  beginning  of  1879, 
to  one  thousand  three  hundred  and  fifty  million  dollars 
($1,350,000,000)  at  the  end  of  1887.  In  the  same  period 
the  note  issues  of  the  national  banks  decreased  from  about 
three  hundred  million  dollars  ($300,000,000)  to  about  two 
hundred  and  fifty  million  dollars  ($250,000,000).* 

There  are  many  banking  institutions  in .  the  United 
States  which  have  not  come  into  the  national  system. 
The  "  Finance  Eeport "  for  1887  gives  statistics  for  2,472 
private  banks,  loan  and  trust  companies,  and  State  banks 
other  than  savings'  banks.  These  institutions  are  pre- 
vented from  issuing  notes  by  the  heavy  tax  (ten  per  cent, 
a  year)  imposed  on  such  notes  by  Act  of  Congress ;  but 
they  can  lend  the  right  to  demand  money  by  check  with 
entire  freedom.  Their  deposits  payable  on  demand  are 
returned  at  seven  hundred  and  eighty  million  dollars 
($780,000,000).  So  far  as  regards  the  volume  of  our  cur- 
rency, this  amount  must  be  added  to  the  one  thousand 
three  hundred  and  fifty  million  dollars  ($1,350,000,000) 
similarly  payable  by  the  national  banks,  making  the 
total  deposit  currency  of  the  country  for  the  year  1887, 
two  thousand  one  hundred  and  thirty  millions  of  dollars 
($2,130,000,000).2 

1  It  may  be  well  to  observe  that  the  silver  certificates  issued  by  the 
Treasury  have  more  than  supplied  the  place,  in  the  ordinary  circula- 
tion, of  the  retired  bank-notes. 

2  The  returns  from  private  banks  are  very  incomplete.    There  are 
in  fact  about  four  thousand  of  them  in  the  United  States. 


160  Political  Economy. 

If  we  add  to  this  sum  the  circulating  notes  of  all 
kinds  in  the  hands  of  the  public,  we  find  the  total  bank 
currency  of  the  United  States  to  be  about  two  thousand 
seven  hundred  and  fifty  millions  of  dollars  ($2,750,- 
000,000).  This  rests  on  a  basis  of  gold  in  the  Treasury 
and  in  the  banks  amounting  to  about  four  hundred 
millions  of  dollars  ($400,000,000),  or  somewhat  more 
than  one  dollar  of  gold  for  seven  of  bank  currency. 

In  other  -words,  if  all  persons  having  a  right  to  de- 
mand true  money  of  the  banks  and  the  Treasury  should 
suddenly  and  simultaneously  demand  payment,  not  much 
more  than  one  dollar  in  seven  could  be  paid  in  gold ;  yet 
every  dollar  of  the  whole  mass  is  doing  the  work  of  a 
gold  dollar  and  (with  the  exception  of  the  silver  certifi- 
cates) is  convertible  into  gold  at  any  time,  at  the  option 
of  the  holder. 

6.  Effect  of  Bank  Currency  on  Prices.  —  Though  prices 
in  the  United  States  are  obviously  six  or  seven  times 
higher  than,  without  the  aid  of  banking,  our  present 
stock  of  gold  would  make  them,  yet  it  would  be  a  mis- 
take to  suppose  that  our  prices  are  six  or  seven  times 
higher  than  they  would  be  if  bank  currency  had  never 
been  invented.  The  stock  of  coin  itself  would  have  been 
greater  than  it  is,  if  its  value  had  not  been  kept  down  by 
the  introduction  of  bank  currency.  How  much  greater 
we  cannot  tell,  because  we  do  not  know  how  great  the 
difficulty  would  have  been  of  adding  a  given  quantity 
to  the  annual  product;  nor  do  we  know  how  much  the 
higher  value  would  have  checked  the  consumption  of 


Bank  Currency.  161 


the  precious  metals  in  the  arts.  But  it  is  certain  that 
much  more  would  have  been  produced  year  by  year,  and 
that  a  smaller  amount  would  have  been  used  in  making 
watches,  jewelry,  etc. 

Of  course,  if  the  whole  world  had  changed  suddenly 
from  the  use  of  coin  in  all  payments  to  a  system  of  bank 
currency  such  as  we  now  have  in  the  United  States,  the 
immediate  effect  on  prices  would  have  been  to  multiply 
them  by  six  or  seven.  But  the  introduction  of  banking 
has  been  gradual,  —  it  is  still  but  slightly  developed  in 
many  parts  of  the  world.1  Moreover  the  period  of  its 
introduction  has  been  one  of  enormous  increase  in  the 
demand  for  money,  owing  to  the  great  increase  in 
the  production  and  exchange  of  commodities. 

Coming  at  such  a  time,  and  expanding  gradually,  bank 
currency  has  had  for  its  chief  effect  the  prevention  of 
a  great  fall  in  prices.  The  world's  stock  of  coin  could 
not  have  been  increased  as  rapidly  as  the  goods  to  be 
exchanged  have  been  increased  in  the  past  hundred 
years.  Even  with  the  great  increase  in  the  production 
of  the  precious  metals  since  1848,  and  the  steady  expan- 
sion of  banking,  the  general  level  of  prices  is  not  much 

1  Deposit-banking  can  hardly  be  said  to  exist  outside  of  the  English- 
speaking  countries.  Circulating  notes  are  used  extensively  in  most 
countries  ;  but  where  circulating  notes  are  preferred  to  deposits,  many 
are  likely  to  prefer  coin  to  the  notes.  In  France,  for  example,  the 
whole  volume  of  bank  currency  is  not  supposed  to  be  equal  to  the 
amount  of  coin  in  the  country.  Obviously,  the  chief  effect  of  a  dispro- 
portional  expansion  of  bank  currency  in  any  one  country  must  be 
to  send  a  part  of  its  coin  away  to  countries  where  banking  is  less 
developed. 


162  Political  Economy. 

higher  now  than  it  was  a  hundred  years  ago.  Had  it  not 
been  for  the  growth  of  bank  currency  prices  must  have 
fallen  very  much. 

The  most  important  effect  of  bank  currency  in  the 
long  run  is  the  saving  of  labor  it  makes  in  providing 
the  medium  for  exchanging  commodities.  It  is  essentially 
a  labor-saving  contrivance.  By  means  of  it  the  labor  of 
one  man  is  made  to  yield  as  much  circulating  medium 
as  the  labor  of  six  or  eight  men  without  it.  Thousands 
of  men  are  thus  released  from  the  work  of  producing 
mere  counters  for  making  exchanges,  and  are  employed, 
instead,  in  adding  to  the  general  stock  of  enjoyable  com- 
modities. 

The  value  of  money,  with  as  without  banking,  tends 
in  the  long  run  to  conform  to  the  cost  of  producing 
the  money-metal.  The  difference  is  that,  with  banking, 
the  real  demand  for  the  metal  at  its  natural  value, 
is  made  much  less  than  it  would  be  without  banking, 
and  thus  the  production  of  it  is  confined  to  the  most 
fertile  sources  of  supply.  Its  value,  therefore,  corre- 
sponds to  the  cost  of  producing  it  where  production  is 
comparatively  easy.  If  the  whole  demand  for  money 
had  to  be  met  with  actual  coin,  less  productive  sources 
of  gold  would  have  to  be  resorted  to,  and  the  value  of  it 
would  be  permanently  higher  than  it  is. 

7.  The  Volume  of  Bank  Currency  Variable,  —  The  use 
of  bank  currency  introduces  an  element  of  unsteadiness 
into  the  circulating  medium.  The  volume  of  it  depends 
very  much  on  the  mere  will  of  the  bankers.  There  is 


Bank  Currency.  163 


a  constant  temptation  to  expand  the  issue  of  it,  because 
every  addition  brings  additional  gain  to  the  banks.  A 
currency  consisting  wholly  of  coin  could  not  be  thus 
increased  at  will. 

In  times  of  business  prosperity  there  is  a  strong  de- 
mand for  loans,  and  when  business  men  are  succeeding 
well,  it  seems  safe  to  lend  to  them  freely.  The  banks  at 
such  times  expand  greatly  the  deposit  portion  of  the  cur- 
rency,—  the  loans  being  given  in  the  form  of  credits  on 
the  bank  books,  just  as  if  the  borrowers  had  actually 
deposited  the  sums  borrowed.  These  credits  become  at 
once  part  and  parcel  of  the  bank  currency  acting  on 
prices. 

As  a  result,  we  have  periods  of  expanding  bank  cur- 
rency and  rising  prices.  Such  periods  are  times  of  great 
activity  and  seeming  prosperity  in  business.  Not  only 
is  the  volume  of  currency  increased,  but  its  rapidity  of 
circulation  is  quickened.  The  result  is  a  steady  and 
often  rapid  rise  of  prices,  i.  e.y  a  fall  in  the  value  of 
money.  Every  rise  of  prices  seems  to  bring  gain  to 
holders  of  commodities  and  to  furnish  a  basis  for  new 
loans  from  banks,  with  consequent  further  increase  of 
bank  currency. 

The  movement  goes  on  until  the  banks  reach  the 
utmost  limit  of  their  lending  power.  The  arrest  of  the 
expansion  is  usually  attended  by  business  failures.  Men 
who  entered  on  speculative  enterprises,  counting  on  con- 
tinued loans  from  the  banks,  are  forced  into  bankruptcy 
when  new  loans  can  no  longer 


164  Political  Economy. 


a  period  of  contraction  in  bank  currency.  The  banks  are 
always  heavy  losers  by  business  failures :  when  these 
begin,  they  scrutinize  sharply  all  applications  for  loans 
and  reject  those  that  are  in  the  least  doubtful.  Further, 
the  changed  condition  of  affairs  causes  men  of  undoubted 
credit  to  have  less  desire  for  loans  than  they  had  while 
business  was  prosperous.  The  result  is  a  general  shrink- 
age of  bank  currency.  There  is  at  the  same  time  a  les- 
sened rapidity  of  circulation.  A  gradual  decline  of  prices 
is  the  necessary  consequence. 

These  changes  in  the  value  of  money  would  probably 
happen  to  some  extent,  even  if  bank  currency  did  not 
exist.  I  think  they  are  primarily  due  to  the  fact  that 
savings  intended  for  investment,  whether  directly  or  by 
loan,  are  always  in  the  form  of  money.  When  savings 
are  promptly  and  fully  invested,  the  currency,  whatever 
its  character,  is  kept  completely  and  actively  in  circu- 
lation. When  savings  accumulate,  unemployed,  in  the 
hands  of  those  who  make  them,  the  supply  of  currency 
offering  for  goods  is  necessarily  diminished. 

The  circumstances  that  cause  banks  to  enlarge  or  to 
curtail  their  loans  in  bank  currency,  would  cause  them 
to  enlarge  or  to  curtail  their  loans,  if  they  had  nothing 
but  coin  to  lend.  The  use  of  bank  currency  simply  in- 
tensifies the  evil  very  much  by  giving  a  wider  scope  for 
enlargement  and  contraction  of  loans. 


CHAPTER    XVI. 

QUESTIONS    BETWEEN    GOLD    AND    SILVER. 

1.  Contrast  between  Gold  and  Silver.  —  In  the  foregoing 
chapters  silver  and  gold  have  been  spoken  of  together, 
as  if  both  could  be  used  as  money,  side  by  side,  on  a 
footing  of  perfect  equality.     We  must  now  consider  some 
difficulties  that  are  met  in  the  attempt  to  use  them  in 
that  manner. 

First,  however,  we  must  note  an  important  difference 
between  the  two  metals.  Weight  for  weight,  gold  is  at 
present  (1889)  worth  nearly  twenty-two  times  as  much 
as  silver.  If  we  compare  them  by  bulk,  the  contrast  is 
still  greater,  —  a  cubic  inch  of  gold  being  worth  nearly 
forty  times  as  much  as  a  cubic  inch  of  silver.1 

2.  Superiority  of  Silver  for  Small  Money.  —  This  wide 
difference  *in  value  gives  each  metal  an  obvious  advan- 
tage over  the  other  for  one  of  the  uses  of  money.     As 
material  for  coins  of  small  value,  silver  is  much  more 
suitable  than  gold.     Dimes  made  of  gold  would  be  almost 
invisible.    Even  the  one-dollar  gold  piece,  formerly  coined 
at  our  mints,  was  found  to  be  inconveniently  small,  and 
the  coinage  of  it  was  given  up.     Coins  so  diminutive  are 

1  The  specific  gravity  of  silver  is  10.47  ;  that  of  gold  is  19.34. 

165 


166  Political  Economy. 

difficult  to  handle  and  are  constantly  in  danger  of  getting 
lost. 

For  small  money,  then,  silver  has  everything  to  recom- 
mend it  over  gold.  But  at  the  other  end  of  the  scale,  it 
must  be  admitted  that  silver  is  subject  to  a  very  serious 
drawback.  Even  so  small  a  sum  of  it  as  ten  dollars 
makes  an  awkward  package  for  carrying  in  one's  pocket. 
A  million  dollars'  worth  of  silver,  at  its  present  value, 
weighs  nearly  forty  tons. 

3.  Superiority  of  Gold  for  Large  Transactions.  —  For 
large  transactions,  gold  is  vastly  more  convenient  than 
silver.  The  labor  of  transporting  a  given  sum  in  gold 
is  less  than  one-twentieth  part  as  great  as  in  the  case 
of  silver.  The  space  required  for  holding  it  is  only  one- 
fortieth  part  as  great.  Any  one  who  has  had  exper- 
ience in  guarding  valuable  articles,  knows  how  much 
the  difficulty  increases  with  increase  of  bulk.  It  is 
many  times  harder  to  make  a  large  "strong  box"  than 
a  small  one. 

Now  the  financial  affairs  of  a  great  commercial  nation 
require  the  constant  care  and  handling  of  large  sums  in 
coin.  In  the  movement  of  such  amounts  as  are  daily 
passing  about  in  the  settlement  of  accounts  between 
banks,  and  in  the  operations  of  the  national  Treasury, 
the  difference  in  favor  of  gold  amounts  in  the  course 
of  a  year  to  a  very  considerable  sum. 

Nor  is  this  a  matter  affecting  the  bankers  alone,  or 
even  chiefly.  The  saving  by  the  use  of  gold  rather 
than  silver  is  a  gain  to  the  whole  community.  Like 


Questions  'between  Gold  and  Silver.  167 

every  other  labor-saving  contrivance,  it  lightens  the 
work  of  production  and  exchange  by  supplying  a  more 
convenient,  instead  of  a  less  convenient  medium.  It 
gives  precisely  the  same  advantage  as  the  use  of  silver, 
rather  than  copper  or  tin,  gives  in  the  case  of  our 
smaller  coinage.  The  benefit  accrues  to  all  who  have 
occasion  to  use  money,  that  is  to  the  whole  community. 
Whatever  makes  banking  difficult  and  costly,  is  sure, 
in  the  long  run,  to  increase  the  cost  to  the  community 
of  the  services  which  the  bankers  render. 

4.  The  Double  Standard.  —  All  men  agree  that  both 
silver  and  gold  are  needed  as  money,  since  each  serves 
a  purpose  for  which  the  other  is  much  less  suitable.  But 
when  we  come  to  the  question  of  the  best  method  of 
obtaining  the  use  of  the  two  metals  in  coinage,  we  find 
ourselves  at  once  in  a  region  of  doubt  and  controversy. 

It  was  once  supposed  that  a  nation  wishing  to  have 
the  use  of  the  two  metals  as  money,  needed  only  to  coin 
both  of  them  freely.  But  experience  has  clearly  proved 
this  to  be  a  mistake.  Every  country  that  has  tried  it  has 
found  that  the  result  is  to  give  the  use  of  one  metal 
only. 

The  reason  is  clear.  The  adoption  of  two  sets  of  coins 
as  full  money,  is  in  fact  an  attempt  to  have  two  stand- 
ard units  for  measuring  value.  The  two  may  indeed  be 
accurately  adjusted  at  the  start,  so  that  a  dollar  of  the 
one  sort  shall  have  precisely  the  same  value  as  a  dollar 
of  the  other  sort,  —  comparing  them  simply  as  (what 
they  are  in  truth)  pieces  of  metals  produced  by  labor. 


168  Political  Economy. 

But  the  difficulty  is  that  each  is  produced  independently 
of  the  other,  and  the  cost  of  production  of  the  Dne  may 
change  without  a  corresponding  change  in  the  cost  of 
the  other.  When  this  happens  (and  it  is  constantly 
happening  in  the  case  of  gold  and  silver)  the  two  sets 
of  dollars  become  unequal  in  natural  value ;  the  country 
acquires  in  consequence  two  different  standards  or  meas- 
ures of  value.  Hence  the  name  of  Double  Standard 
applied  to  this  arrangement. 

Now  to  set  up  two  different  measures  of  value  would 
be  as  absurd  and  inconvenient  as  to  adopt  two  yard- 
sticks of  unequal  length,  or  two  bushel  measures  of 
unequal  capacity:  The  law,  where  the  double  standard 
prevails,  attempts  to  keep  the  two  kinds  of  money  equal 
in  value  by  providing  that  each  kind  shall  be  lawful 
money  and  a  legal  tender  to  any  amount.  This  does 
indeed  cause  the  two  kinds  to  have  equal  value  (i.  e., 
market  value)  so  long  as  both  continue  to  circulate :  but 
the  effect,  in  the  end,  is  to  drive  one  of  them  out  of 
use  as  money.  It  is  the  fatal  weakness  of  the  double 
standard  that,  while  in  theory  it  is  a  plan  for  giving  us 
the  use  of  both  gold  and  silver  as  money,  it  is  in  practice 
a  plan  that  limits  us  to  one  of  the  two. 

5.  Double  Standard  in  the  United  States.  —  The  practi- 
cal working  of  the  double  standard  may  be  readily  seen 
by  studying  the  history  of  it  in  our  own  case.  Our  first 
national  coinage  was  made  under  an  Act  of  Congress 
passed  in  1792.  Under  this  act  gold  and  silver  were 
coined  free  of  charge  for  all  persons  sending  in  the 


Questions  between  Gold  and  Silver.  169 

necessary  bullion,  —  one  pound  of  gold  being  made  into 
as  many  dollars  as  fifteen  pounds  of  silver.  Coins  of 
either  were  made  a  "  lawful  tender  in  all  payments  what- 
soever." 

The  ratio  of  1  =  15  was  approximately  correct  at  the 
date  of  the  Act.  But  silver  was  at  that  time  slowly 
declining  in  value  as  compared  with  gold,  owing  to 
increased  production  of  it  in  Mexico.  By  the  year  1800 
one  ounce  of  gold  was  worth  15i  ounces  of  silver. 

In  this  state  of  things  men  ceased  to  carry  gold  to  our 
mints  to  be  coined.  They  even  found  a  profit  in  sending 
out  of  the  country  the  gold  already  coined.  For  fifteen 
thousand  dollars  in  gold  one  could  buy  silver  enough 
abroad  to  make  fifteen  thousand  five  hundred  silver 
dollars,  thus  gaining  five  hundred  dollars  by  the  oper- 
ation. As  a  result  the  gold  coin  of  the  United  States 
disappeared  from  circulation,  and  the  country  was  left 
with  silver  alone. 

In  1834  an  Act  of  Congress  was  passed  to  restore  the 
use  of  gold.  By  this  Act  it  was  ordered  that  a  less 
quantity  of  gold  should  be  used  in  making  the  gold 
coins  thereafter.  In  the  new  arrangement  one  ounce  of 
gold  was  coined  into  as  many  dollars  as  sixteen  ounces 
of  silver.1 


1  The  amount  of  pure  gold  in  the  eagle  was  cut  down  from 
grains  to  232  grains.  The  quantity  of  pure  silver  in  the  silver  dollar 
was  and  is  371£  grains.  23.2  :  371£  =  1  :  10—.  Our  standard  gold  and 
silver  contain  one  part  alloy  for  nine  of  pure  gold  or  silver  ;  the  weight 
of  the  silver  dollar-piece  is  therefore  412£  grains  (37  1^  of  silver  and 
41i  of  alloy). 


170  Political  Economy. 

Just  before  the  passage  of  the  Act  silver  had  fallen 
to  about  16  —  1,  but  it  rose  again  and  remained,  in  the 
markets  of  the  world,  above  our  coinage  valuation. 
There  was,  therefore,  in  the  new  adjustment,  the  same 
reason  for  exporting  our  silver  coins  to  pay  for  gold,  as 
there  had  been  in  the  previous  adjustment  for  the  reverse 
operation. 

The  consequence  was  that  all  full-weight  silver  coins 
presently  disappeared  from  circulation,  and  their  places 
were  taken  by  the  new  gold  coinage.  Even  the  small 
change  disappeared  with  the  rest,  excepting  the  pieces 
that  were  too  much  worn  to  be  sold  as  silver.  By  1850 
we  had  a  coinage  consisting  almost  exclusively  of  gold, 
with  worn  Mexican  silver  for  change.  New  silver  pieces 
were  coined  from  time  to  time  by  the  Government,  but 
they  disappeared  as  speedily  as  they  were  issued. 

6.  Gold  Standard  with  Subsidiary  Silver.  —  In  order 
to  remedy  this  evil,  an  Act  was  passed  in  1853  which 
provided  that  the  smaller  silver  pieces  to  be  coined 
thereafter  should  contain  about  seven  per  cent,  less  silver 
than  the  former  issues.1  This  device  was  adopted  in  order 
that  the  new  issues  might  be  worth  less  as  mere  silver 

O 

than  as  coins  of  the  United  States,  and  should  therefore 
always  stay  in  circulation.  In  other  words,  the  amount 
of  silver  in  the  half  dollar,  the  quarter,  the  dime,  etc., 
was  known  and  intended  to  be  worth  less  than  the  sum 
the  coin  was  to  pass  for. 

1  One  dollar  of  the  new  silver  change  contains  only  384  grains  of 
standard  silver,  whereas  the  silver  dollar-piece  weighs  412£  grains. 


Questions  between  Gfotd  and  Silver.  171 

The  new  coins  were  not  made  a  legal  tender  for  sums 
exceeding  five  dollars.  The  privilege  of  getting  silver 
coined  into  these  pieces  was  conferred  on  the  Treasury 
alone,  in  order  to  guard  against  excessive  production  of 
them. 

These  light-weight  silver  coins,  of  limited  legal- tender 
quality,  are  called  a  subsidiary  coinage.  The  result  of 
the  Act  of  1853  was  to  give  us,  in  practice,  the  single 
gold  standard  with  a  limited  supply  of  silver  coins  for 
small  payments.1  The  arrangement  worked  well,  and 
remained  in  operation  until  the  over-issue  of  inconvert- 
ible currency  during  the  Civil  War  drove  all  sorts  of 
metallic  money  out  of  use.  It  is,  so  far  as  experience 
goes,  the  only  plan  that  succeeds  in  giving  a  country 
the  use  of  both  metals. 

Since  the  Eesumption  of  Specie  Payments  at  the  be- 
ginning of  1879  we  have  again  had  in  practice  the  single 
gold  standard,  with  the  subsidiary  silver  coins  provided 
by  the  Act  of  1853.  Unfortunately,  however,  we.  have 
also  some  peculiar  enactments  regarding  the  silver  dollar 
which  are  likely,  unless  repealed,  to  bring  us  again  into 
the  troubles  of  the  Double  Standard. 

7.  The  Silver  Act  of  1878.  —  After  the  change  of  ratio 
in  1834,  owners  of  silver  ceased  to  get  it  coined  into 
dollars.  In  the  year  1873  the  right  of  getting  it  so 

1  It  was  still  the  right  of  any  person  having  silver  bullion  to  get  it 
coined  into  dollars  of  412£  grains  standard  silver.  But  412£  grains  of 
standard  silver  could  be  sold  for  more  than  a  dollar ;  so  no  man  cared 
for  the  privilege  of  getting  it  coined  into  a  dollar. 


172  Political  Economy. 

coined  was  abolished.1  Shortly  after  this  was  done  the 
value  of  silver  began  to  decline.  By  the  year  1876  it 
had  fallen  so  much  that  41 2£  grains  of  silver  could  be 
bought  for  ninety  cents  in  gold. 

The  primary  cause  of  the  decline  was  the  discovery 
of  new  and  very  productive  mines  in  Colorado  and 
Nevada.  The  effect  of  the  great  increase  of  production 
that  followed  was  intensified  by  the  cessation  of  silver 
coining  by  Germany,  France,  and  Italy.  The  mints  of 
those  countries  had  previously  absorbed  a  considerable 
part  of  the  current  product.  By  the  stoppage  of  most 
of  the  coinage  demand  for  new  silver,  the  metal  in  the 
uncoined  state  ceased  to  have  its  value  steadied  as  the 
value  of  money  is  steadied.  It  became  possible  for 
the  value  of  silver  bullion  to  fall  indefinitely  below  the 
value  of  the  same  quantity  of  silver  in  the  form  of 
coin.  In  a  word,  silver  bullion  could  fall,  and  did  fall, 
in  value,  just  as  copper  or  iron  fall  when  the  production 
is  increased. 

The  producers  of  silver  in  this  country  were  naturally 
clamorous  to  regain  the  right  of  converting  their  product 
into  money.  They  were  joined  in  this  demand  by  many 
unthinking  persons  who  imagined  the  increase  of  silver 

1  The  Act  of  Congress  authorizing  the  coinage  of  the  trade  dollar 
contained  the  clause,  "  The  silver  coins  of  the  United  States  shall  be 
a  trade  dollar,  a  half  dollar  or  fifty  cent  piece,  a  quarter  dollar,  etc." 
The  old  silver  dollar  (412£  grains)  was  omitted  from  the  list.  The 
trade  dollar  was  intended  for  use  in  the  Oriental  trade  ;  its  weight  was 
made  420  grains,  in  order  to  match  the  currency  already  in  use  in  that 
trade. 


Questions  between  Gold  and  Silver.  173 

money  would  be  a  good  thing  for  the  whole  community. 
The  agitation  led  to  the  passage,  in  1878,  of  an  Act  of 
Congress  providing  for  a  renewal  of  the  coining  of  silver 
dollars. 

The  Act  requires  the  Secretary  of  the  Treasury  to  buy 
silver  at  the  market  price,  and  coin  not  less  than  two 
millions,  nor  more  than  four  millions,  of  silver  dollars 
each  month.  Private  owners  of  bullion  are  not  entitled 
to  have  it  coined  at  their  pleasure,  as  they  were  previ- 
ous to  1873. 

Upwards  of  three  hundred  millions  of  silver  dollars 
have  already  been  coined  under  this  Act  (close  of  1888). 
For  the  most  part  these  coins  remain  on  the  hands  of 
the  Government;  they  are  stored  in  the  Treasury  arid 
Sub-Treasuries.  Yet  we  go  on  coining  them.  In  the 
whole  history  of  the  United  States,  from  the  opening 
of  our  mint  down  to  the  year  1878,  the  total  number  of 
silver  dollars  coined  was  only  eight  millions.  Now  we 
coin  that  number  every  four  months. 

This  is  a  foolish  waste  of  the  public  revenue.  It 
benefits  nobody  except  the  proprietors  of  silver  mines ; 
these  are  no  doubt  glad  to  have  so  good  a  market  for  two 
millions  of  their  product  every  month.  But  there  is 
no  reason  why  the  nation  should  single  out  the  pro- 
ducers of  silver  for  this  benefaction,  rather  than  the 
producers  of  tin  or  copper.  The  only  interest  of  the 
nation  in  the  matter  is  to  keep  its  currency  on  a  sound 
basis :  and  this  is  not  accomplished  by  the  compulsory 
purchase  and  coinage  of  two  millions  of  silver  dollars 


174  Political  Economy. 

each  month,  to   be   stored   away  in   the  vaults    of   our 
national  Treasury. 

8.  Our  Currency  Tending  Towards  the  Silver  Standard.  — 
Thus  far  our  national  money  has  suffered  no  serious  harm 
from  the  Act  of  1878.  The  restriction  on  the  coinage 
of  silver  has  saved  us  from  descending  to  the  silver 
standard.  But  if  the  Act  remains  unrepealed,  it  must  end 
in  causing  our  stock  of  gold  to  leave  us  and  in  bringing 
down  the  standard  of  our  dollar  to  the  market  value  of 
41 2  i  grains  of  silver. 

The  process  will  be  comparatively  slow.  The  issue 
of  additional  silver  certificates,  month  by  month,  goes 
to  swell  our  currency  and  tends  to  lower  the  value  of 
money,  i.  e.,  to  raise  prices.  This  will  attract  increased 
importation  of  goods  from  other  countries,  and  will  at 
the  same  time  check  the  exportation  of  our  products. 
The  balance  which  we  shall  owe  to  other  nations  in  conse- 
quence will  have  to  be  paid-in  money,  and  gold  will  be 
the  money  sent  to  pay  it. 

So  long  as  any  considerable  quantity  of  gold  remains 
in  the  country,  the  currency  will  keep  on  the  gold  basis. 
But  when  the  gold  has  been  drained  off,  the  further 
increase  of  silver  certificates  will  not  be  offset  by  a  de- 
crease of  any  other  sort  of  currency.  The  result  will 
be  that  it  will  gradually  sink  in  value  until  a  dollar  of 
it  will  just  buy  41 2^  grains  of  standard  silver.  Sup- 
posing no  further  decline  in  the  value  of  silver  to  occur 
in  the  meantime,  this  would  give  us  a  currency  in  which 


Questions  between  Gold  and  Silver.  175 

each  dollar  would  be  worth,  at  most,  seventy-five  cents 
of  our  present  money.1 

In  order  to  restore  the  circulation  of  gold  we  should 
then  have  to  coin  a  new  supply  of  gold  pieces,  lighter 
than  the  present  ones,  —  just  as  the  present  ones  are 
lighter  than  those  coined  before  1834.  The  change,  how- 
ever, the  debasement,  would  have  to  be  much  greater  in 
the  new  case  than  it  was  under  the  Act  of  1834.  Every 
successive  stage  in  the  vain  struggle  to  keep  two  money- 
standards  in  use  side  by  side,  involves  a  recoining  of  one 
metal  or  the  other,  and  a  continuous  debasing  of  both 
standards. 

The  present  law  is  drawing  us  slowly  but  surely 
towards  a  currency  based  on  silver  alone.  If  the  nation 
desires  such  a  currency,  it  is  clearly  entitled  to  have  it. 
But  the  present  law  is  a  most  wasteful  and  extravagant 
mode  of  accomplishing  the  object.  We  have  already 
coined  and  stored  in  the  Treasury  enough  silver  dollars 
to  answer  as  a  reserve  for  a  thousand  millions  in  circu- 
lating notes,  —  that  isp  for  some  hundreds  of  millions 
more  paper  money  than  we  have  ever  used  in  the  past. 
And  yet  the  Act  of  1878  requires  the  Secretary  of  the 
Treasury  to  add  two  millions  of  new  silver  dollars  to 

1  The  London  price  of  silver  has  fluctuated  of  late  between  42d.  and 
44d.  the  ounce.  This  is  for  English  standard  silver,  3740ths  fine  (i.  e., 
thirty-seven  parts  silver  to  three  parts  alloy).  The  ounce  therefore 
contains  444  grains  of  pure  silver.  Our  dollar  piece  of  412£  grains 
contains  37 H  grains  of  pure  silver,  the  American  standard  being  9-10ths 
fine.  At  44d.  for  the  English  ounce,  our  silver  dollar  is  worth  74£  cents 
in  American  gold. 


176  Political  Economy. 


the  stock  every  month.  This  is  simply  a  waste  of  the 
public  revenues.  If  the  object  be  to  bring  our  currency 
upon  a  silver  basis,  it  ought  at  least  to  be  done  on  an 
economical  plan.1 

Some  persons  seem  to  assume  that  the  country  is 
under  a  moral  obligation  to  coin  all  the  silver  that  may 
be  produced.  Our  only  obligation  in  the  case  is  to  keep 
the  currency  of  the  country  on  a  sound  basis ;  especially 
to  avoid,  as  far  as  we  can,  every  act  that  tends  to  cause 
needless  fluctuations  in  the  value  of  our  money. 

9.  The  Silver  in  the  Treasury  not  a  Strict  Reserve.— 
It  has  been  stated  (Chap.  XV.,  §  5,  note)  that  the  silver 
dollars  in  the  Treasury  have  strictly  no  part  in  main- 
taining the  value  of  the  certificates  issued  in  respect  of 
them.  The  grounds  of  this  statement  are  now  obvious. 
There  is  not  the  least  likelihood  of  a  call  for  silver 
dollars.  Whenever  a  demand  for  specie  arises,  whether 
for  exportation  or  any  other  purpose,  it  is  certain  to  be 
a  demand  for  gold.  The  issue  of  the  silver  certificates, 

1  The  chief  use  made  of  the  silver  dollars  hitherto  has  been  to  issue 
upon  them  an  equal  amount  of  silver  certificates.  But  coin  certificates 
are  a  very  costly  form  of  circulating  notes.  They  were  originally 
intended,  not  for  general  circulation,  but  for  use  in  payments  between 
banks  and  other  moneyed  institutions,  —  as  the  gold  certificates  are 
for  the  most  part  still  used.  Three  quarters  of  the  coin  held  against 
the  present  issue  of  silver  certificates  might  be  spared,  even  if  it  were 
a  true  reserve,  without  in  the  least  endangering  the  convertibility  of 
the  certificates.  The  number  of  silver  dollars  in  the  Treasury  at  this 
date  (close  of  1888)  is  roughly  two  hundred  and  sixty  million  ($260,- 
000,000) ;  the  amount  of  silver  certificates  outstanding  is  about  two 
hundred  and  forty  million  dollars  ($240,000,000). 


Questions  between  Gold  and  Silver.  177 

by  swelling  the  currency,  tends  to  create  such  a  demand. 
The  situation  would  not  be  essentially  different,  in  this 
respect,  if  we  had  an  addition  to  the  United  States  notes 
equal  in  amount  to  the  silver  certificates  issued,  and 
the  silver  in  the  Treasury  were  still  in  the  bowels  of  the 
earth. 

If  ever  our  currency  is  allowed  to  depreciate  to  the 
silver  standard,  the  case  will  be  different.  The  silver 
dollars  will  then  become  a  true  reserve.  As  a  some- 
what early  preparation  against  that  time,  the  store  of 
silver  in  the  Treasury  may  have  some  importance.  But, 
for  any  present  relation  to  our  currency,  it  might  as 
well  be  a  store  of  bits  of  iron  or  leather  bearing  the 
mint-marks  of  the  United  States,  and  declared  by  law  to 
be  legal  tender.  The  immediate  danger  of  any  general 
presentation  of  the  certificates  for  redemption  would  be 
precisely  as  great  in  the  one  case  as  in  the  other. 

The  whole  stress  of  our  currency,  as  regards  its  true 
reserve,  falls  on  the  gold.  Even  if  the  Treasury  and 
the  banks  should  cease  to  pay  gold  on  demand,  there 
would  be  no  call  for  silver  dollars,  so  long  as  the  vol- 
ume of  the  currency  is  kept  within  its  present  limits. 
Nothing  but  inflation  and  consequent  fall  of  value  will 
cause  the  stored  silver  of  the  Treasury  to  fill  the  place 
of  a  coin  reserve  for  any  part  of  the  note  circulation. 

10.  International  Bimetallism.  —  A  movement  has  re- 
cently been  set  on  foot  aiming  to  bring  the  chief  com- 
mercial countries  into  a  general  agreement  regarding  the 
use  of  gold  and  silver  as  money.  The  advocates  of  this 


178  Political  Economy. 

plan  contend  that,  if  the  chief  nations  should  agree  to 
coin  both  metals  freely,  all  using  the  same  mint  ratio 
of  values,  both  metals  would  remain  permanently  in 
circulation  in  each  country. 

They  argue  that  the  failure  of  the  Double  Standard 
hitherto  has  been  due  to  the  want  of  uniformity  in  the 
treatment  of  the  two  metals  in  different  countries.  They 
point,  for  example,  to  the  fact  that  when  the  United 
States,  under  the  Act  of  1792,  found  it  impossible  to 
keep  gold  in  use  as  money,  our  coinage  laws  placed  the 
ratio  at  1:15,  whereas  France  used  the  ratio  l:15i.  In 
that  situation  the  gold,  they  say,  went  to  France  simply 
because  that  country  set  its  coinage  value  higher  in 
terms  of  silver  than  the  United  States  did. 

The  bimetallist  theory,  briefly  stated,  is  that  if  the 
great  commercial  nations  should  agree  on  a  common  ratio 
for  gold  and  silver^  and  should  all  adopt  the  double  stand- 
ard on  that  basis,  the  two  metals  would  remain  perma- 
nently in  circulation  everywhere,  with  the  relative  value 
agreed  upon.  There  can  be  no  doubt  that  such  an  ar- 
rangement would  prevent  wholesale  interchanges  of  gold 
and  silver  between  countries.  But  it  does  not  follow  that 
it  is  the  only,  or  even  the  best,  solution  of  the  coinage 
question. 

The  general  adoption  of  the  single  gold  standard,  with 
subsidiary  silver  coins,  would  equally  cut  off  the  motive 
for  mere  interchange  of  coins  between  countries. 

11.  Weakness  of  the  Bimetallic  Theory.  —  The  bimetal- 
list  contention  that  two  metals  with  full  legal  tender 


Questions  between  Gold  and  Silver.  179 

quality  are  better  than  one,  or  are  in  the  least  neces- 
sary, has  not  been  successfully  maintained.  Two  vari- 
able standards  expose  us  to  two  sets  of  variations  in 
the  value  of  money,  instead  of  one.  The  argument  that 
there  is  not  enough  gold  to  suffice  for  all  countries, 
ignores  the  fact  that  the  modern  way  of  using  metallic 
money,  makes  a  dollar  go  as  far  as  seven  or  eight  dollars 
went  two  hundred  years  ago.  The  age  in  which  metallic 
money  is  passing  out  of  use  as  active  currency,  and  into 
use  as  a  mere  reserve  for  the  active  currency,  is  a  time 
when  gold  may  safely  be  adopted  as  the  single  standard 
for  large  payments.  Bank  currency  based  on  gold  may 
far  exceed  the  total  supply  of  both  gold  and  silver. 

The  proposition  that  the  comparative  value  of  gold 
and  silver  may  be  permanently  controlled  by  inter- 
national agreement,  is  one  that  can  hardly  be  admitted 
without  better  evidence  of  its.  soundness  than  has  yet 
been  supplied.  No  man  would  maintain  the  same  doc- 
trine with  reference  to  any  other  two  products  of  labor, 
even  in  cases  where  the  one  is  largely  a  substitute  for 
the  other:  e.g.,  beef  and  mutton,  corn  meal  and  rye  meal, 
tin  and  zinc.  It  is  the  common  mark  of  all  foolish 
schemes  for  "  improving  "  the  world's  currency,  that  they 
set  out  by  falsely  assuming  a  fundamental  difference 
between  money  and  all  other  products  of  human  labor. 
Any  scheme  is  sure  to  fail  in  the  long  run,  if  it  under- 
takes to  put  the  material  of  our  money  under  other  con- 
trol than  that  to  which  the  value  of  all  other  products 
of  labor  are  subject,  namely,  the  cost  of  its  production. 


180  .      Political  Economy. 

The  bimetallic  theory  holds  that  the  value  of  gold  may 
be  made  to  follow  the  cost  of  silver,  and  the  value  of 
silver  the  cost  of  gold,  simply  by  the  force  of  laws  and 
treaties.1 

If  the  governments  of  the  leading  countries  should 
attempt  to  fix  the  comparative  value  of  tin  and  zinc  by 
international  agreement  and  force  of  law,  we  readily  see 
that  this  would  not  be  enough  to  ensure  success.  The 
agreeing  governments  would  have  to  undertake  the  duty 
of  keeping  the  market  supplied  with  each  metal  at  that 
value,  or  run  the  risk  of  having  the  supply  of  one  or  the 
other  fall  short  of  the  demand,  or  even  fail  entirely. 

It  has  not  been  shown  that  international  bimetallism 
could  be  counted  on  to  give  us  a  desirable  proportion  of 
each  metal,  or  indeed  both  metals  in  any  proportion.  The 

1  The  advocates  of  the  theory  lay  much  stress  on  what  they  assume 
to  be  a  powerful  check  against  the  withdrawal  of  either  metal  from 
use  as  money,  owing  to  a  fall  in  the  value  of  the  other.  The  with- 
drawal of  gold  from  use  as  money  would  cause  an  increased  supply 
and  a  decline  of  its  value,  as  a  material  for  use  in  the  arts :  on  the 
other  hand,  the  increased  demand  for  silver  as  money  to  take  the 
place  of  the  gold  withdrawn,  would  cause  a  rise  of  its  value.  Thus, 
they  hold,  the  two  metals  would  tend  to  keep  the  relative  values  im- 
posed on  them  by  the  international  league.  All  this  may  be  admitted 
so  far  as  temporary  changes  are  concerned ;  but  it  does  not  touch  the 
fundamental  question  of  the  permanent  supply  of  both  metals,  espe- 
cially that  proportional  supply  of  each  which  may  best  serve  the 
public  convenience. 

If,  for  example,  international  bimetallism  had  been  adopted  when 
the  ratio  was  1  =  10,  does  any  person  suppose  that  gold  would  now  be 
in  use  as  money  at  that  ratio  unless  the  governments  of  the  various 
countries  should  have  kept  up  the  supply  of  it  at  a  loss  to  themselves? 


Questions  'between,  Gold  and  Silver.  181 


agreeing  countries  might,  in  the  long  run,  find  themselves 
limited  to  the  use  of  one  metal,  unless  their  governments 
should  assume  the  burden  of  keeping  up  the  coinage  sup- 
ply of  both  at  the  agreed  ratio,  in  case  private  producers 
of  either  metal  should  cease  to  offer  it  for  coining. 

12.  The  Nations  not  likely  to  Agree  in  restoring  Silver.— 
Finally,  there  is  little  prospect  of  any  international 
compact  on  the  subject  of  bimetallism.  There  have  been 
several  conferences  of  delegates  from  the  chief  commer- 
cial countries,  but  no  progress  has  been  made  towards 
a  general  agreement.  Great  Britain  and  Germany  are 
unwilling  to  abandon  the  gold  standard,  and  without 
their  co-operation,  a  bimetallic  league  would  have  poor 
chances  of  even  temporary  success.1 

Meantime  all  countries  (except  the  United  States)  that 
desire  to  have  the  use  of  any  gold  as  money,  have  closed 
their  mints  to  the  further  coinage  of  silver.  The  value 
of  silver  has  now  fallen  so  far,  and  its  production  has 
increased  so  much  in  spite  of  the  fall  in  value,  that  it 
would  be  an  act  of  daring  rather  than  of  statesmanship 
to  propose,  whether  with  or  without  an  international 
agreement,  a  restoration  of  unrestricted  coinage  at  the 
old  European  ratio  of  1  =  15J. 

1  If  the  nations  ever  make  general  agreements  on  the  subject  of 
money,  it  is  to  be  hoped  that  they  may  adopt  a  common  unit  of  coin- 
age as  well  as  a  common  treatment  of  gold  and  silver.  What  could 
be  more  inconvenient  or  absurd  than  the  present  confusion  of  mone- 
tary units  ?  One  dollar  of  United  States  money  =  4s.  Hd.  English 
money  =  5.18  francs  of  French  money  —  4.2  marks  of  German  money 
=  2.6  florins  of  Dutch  money,  etc. 


CHAPTER   XVII. 

INCONVERTIBLE  LEGAL -TENDER  NOTES. 

1.  Character  of  Inconvertible  Notes. — There  is  a  squalid 
imitation  of  bank  currency  known  as  "  inconvertible  "  or 
"irredeemable"  notes,  These  differ  from  true  bank-notes 
in  the  one  point  that  makes  the  latter  acceptable :  they 
give  the  holder  no  title  to  coin.  No  provision  is  made 
for  paying  coin  to  such  as  may  desire  it :  hence  the  name 
of  this  species  of  currency. 

Inconvertible  notes  are  usually  issued  by  needy  gov- 
ernments as  a  way  out  of  financial  embarrassment.  They 
are  declared  by  law  to  be  "  lawful  money  and  a  legal 
tender;"  that  is  to  say,  the  offer  of  them  in  payment  of  a 
debt  is  to  be  regarded  by  the  courts  as  if  it  were  an  offer 
of.  real  money.  This  provision  gives  them  a  forced  cir- 
culation. Though  everybody  knows  that  they  give  the 
holder  no  real  title  to  coin  or  to  anything  else  of  value, 
yet  the  fact  that  they  can  be  used  in  paying  debts  makes 
everybody  willing  to  receive  them. 

If  the  issue  of  such  notes  were  kept  somewhat  with- 
in the  amount  the  community  would  naturally  use  of 
redeemable  notes,  no  great  harm  would  be  done.  The 
trouble  is  that  no  government  has  ever  resorted  to  the 
issue  of  inconvertible  currency  without  carrying  it  far 
182 


Prices  in  Depreciated  Notes.  183 

beyond  this  limit.  Our  own  country  suffered  much  from 
the  evil  before  and  during  the  Eevolution,  and  again 
during  the  Civil  War. 

2.  Effects  of  Inconvertible  Currency  on  Prices.  —  In 
considering  the  effects  of  inconvertible  currency,  it 
is  necessary  to  distinguish  two  cases,  or  stages.  When 
the  issue  of  inconvertible  notes  is  begun  in  a  country,  the 
first  effect  is  simply  to  increase  the  general  currency, 
and  raise  all  prices.  The  rise  of  prices  causes  a  change 
in  the  external  trade  of  the  country;  fewer  goods  are 
sent  abroad  and  more  goods  are  brought  in.  To  pay  the 
balance  thus  accruing,  the  coin  and  notes  convertible  into 
coin  are  drawn  on,  —  the  inconvertible  notes  being  of  no 
use  for  that  purpose. 

Every  addition  made  to  the  inconvertible  paper  is  fol- 
lowed by  the  gradual  disappearance  of  an  equal  quantity 
of  the  sound  currency.  While  any  of  the  latter  remains 
in  circulation,  the  value  of  the  new  notes  is  not  affected 
by  their  inconvertible  character.  The  new  issue  simply 
has  the  effect  of  raising  all  prices  and  thus  lowering  the 
value  of  all  money.  The  fall  is  checked  by  the  continual 
lessening  of  the  good  money. 

But  when  the  issue  has  been  so  increased  that  all  the 
sound  currency  has  been  displaced  from  the  circulation, 
a  new  stage  is  entered  upon.  Every  addition  of  irredeem- 
able notes  after  that  point  is  reached,  is  followed  by  a 
corresponding  depreciation  of  the  whole  mass.  If  the 
quantity  be  doubled,  prices  will  be  doubled  also,  —  each 
dollar  becoming  worth  only  half  of  a  real  dollar. 


184  Political  Economy. 

In  a  country  that  has  a  depreciated  currency  of  legal- 
tender  paper,  the  prices  of  commodities  are  fictitious 
rather  than  real  prices.  Though  the  terms  of  true 
money  continue  to  be  used,  they  have  no  reference  any 
more  to  true  money,  but  to  the  pieces  of  stamped  paper 
arbitrarily  substituted  for  money  by  force  of  law.  In 
order  to  discover  the  real  price  of  any  article  one  must 
ascertain  the  price  of  the  currency  itself. 

For  example,  in  July,  1864,  two  dollars -and  a  half 
of  United  States  notes  (legal  tender)  could  be  bought  for 
one  dollar  in  gold.  In  that  condition  of  things,  the  real 
price  of  an  article  selling  for  twenty  dollars  in  paper 
was  only  eight  dollars. 

3.  Injustice  Caused  by  Excessive  Issues.  —  Inconvertible 
currency,  when  issued  in  excess,  becomes  the  instrument 
of  great  injustice.  For  instance,  a  man  who  borrowed 
$1,000  in  this  country  in  1861,  when  dollars  were  real 
dollars,  to  be  paid  back  in  three  years,  was  enabled  by 
an  unjust  law  to  discharge  the  debt  in  1864  by  paying 
$400.  The  overissue  of  legal-tender  notes  has  the  effect 
of  confiscating  a  part  of  every  outstanding  claim.  A  law 
authorizing  one  citizen  to  defraud  another  would  not  be 
more  unjust. 

A  similar  injustice  is  inflicted  on  debtors  when  a 
depreciated  legal-tender  currency  is  restored  to  the  specie 
standard.  Debts  which  were  incurred  in  the  time  of 
depreciation  have  to  be  paid  off  in  dollars  of  higher  value 
than  those  in  which  they  were  incurred.  A  larger  quan- 
tity of  wealth  has  to  be  paid  than  the  agreement  really 
stipulated. 


Evil  Effects  of  Overissue.  185 

This  latter  hardship  is  usually  suffered  on  a  great 
scale  by  the  offending  government  itself,  when  it  sets 
about  retrieving  its  affairs  in  honorable  ways.  In  the 
first  place,  it  must  redeem  the  depreciated  notes  them- 
selves in  real  money,  although  for  all  of  them  issued  after 
depreciation  began,  it  received  less  than  the  value  of  real 
money.  Secondly,  a  time  of  overissue  of  notes  is  nearly 
always  a  time  of  copious  borrowing  on  the  part  of  the 
government.  The  greater  the  depreciation  of  the  cur- 
rency, the  greater  the  borrowing  has  to  be ;  for  the  price 
of  everything  the  government  has  to  buy,  as  well  as  the 
wages  it  has  to  pay  to  its  soldiers  and  workman,  are 
raised  by  every  depreciation  of  the  currency. 

In  other  words,  the  dollars  it  borrows  and  spends  are 
no  real  dollars,  though  it  is  in  honor  bound  to  treat  them 
as  if  they  were.  The  currency  which  it  has  itself  cre- 
ated, and  which  it  compels  private  citizens  to  accept  as 
money,  it  cannot  well  decline  to  receive  from  those  who 
subscribe  to  its  loans.  Its  debt  becomes  swollen  in  con- 
sequence of  the  depreciation  of  the  currency,  far  beyond 
the  figures  it  would  have  reached  if  its  affairs  were  con- 
ducted on  the  basis  of  coin.  Each  dollar  of  this  inflated 
indebtedness  has  later  to  be  paid  in  real  money,  when 
the  time  for  payment  arrives.  It  has  been  estimated  that 
the  National  Debt  incurred  by  the  United  States  dur- 
ing the  Civil  War  was  greater  by  eight  hundred  and 
sixty  million  dollars  ($860,000,000),  than  it  would  have 
been  if  the  overissue  of  greenbacks  had  been  avoided.1 
1  Bowen,  American  Political  Economy,  p.  408. 


186  Political  Economy. 

4  No  Justification  for  making  Notes  Inconvertible.— 
The  evils  attending  the  overissue  of  inconvertible  cur- 
rency being  so  great,  no  wise  statesman  could  advocate 
the  use  of  so  perilous  a  substitute  for  money.  If  a  gov- 
ernment wishes  to  issue  circulating  notes,  there  is  no 
sound  reason  why  it  should  seek  to  escape  the  obligation 
of  redeeming  in  coin  such  of  them  as  may  be  presented 
for  redemption. 

The  whole  saving  effected  by  making  the  notes  incon- 
vertible is  measured  by  the  amount  of  reserve  that  would 
have  to  be  kept  for  redeeming  them.  A  government,  at 
least  one  that  always  makes  good  its  promises,  enjoys 
higher  credit  than  the  banks.  Banks  find  a  twenty-five 
per  cent,  reserve  against  circulation  sufficient  to  maintain 
the  convertibility  of  their  notes.  It  is  probable  that 
a  government  which  kept  its  issue  within  wise  limits, 
would  not  need  more  than  a  twenty  per  cent.,  or  even 
a  fifteen  per  cent,  reserve  in  specie.  That  for  the  sake 
of  avoiding  this  slight  burden,  any  government  should 
subject  its  citizens  to  the  possible  wrongs  and  injuries 
of  a  depreciated  currency,  is  a  circumstance  not  easily 
explained.  The  justification  alleged  is  usually  a  sup- 
posed necessity.  But  whatever  momentary  advantage  a 
government  gains  by  resorting  to  inconvertible  notes,  it 
gains  at  the  expense  of  its  own  citizens.  No  other  form 
of  tax  could  be  more  burdensome  or  unjust. 

5.  Except  in  Special  Cases,  the  Value  of  these  Notes 
depends  on  the  Quantity  Issued.  —  It  might  be  supposed 
that  the  value  of  inconvertible  notes  would  depend  on 


Law  of  Value  of  Irredeemable  Notes.  187 

the  prospect  of  their  ultimate  redemption.  This,  how- 
ever, is  not  the  case.  Their  value  would  be  the  same 
even  if  it  should  be  expressly  enacted  that  they  are 
never  to  be  redeemed.  So  long  as  they  constitute  the 
working  currency  of  the  country,  prices  of  commodities 
expressed  in  that  currency  are  governed  by  the  quantity 
circulating  and  the  rapidity  of  circulation,  just  as  in 
the  case  of  true  money. 

The  prospect  of  speedy  redemption  may  indeed  limit 
the  depth  of  depreciation.  Notes  that  are  certain  to 
be  redeemed  a  year  hence  cannot  fall  below  the  specie 
standard  by  more  than  the  current  rate  of  interest.  If 
they  did,  a  part  of  them  would  be  quickly  taken  up  and 
held  as  an  investment.  The  promise  of  early  redemp- 
tion may  thus  raise  the  value  of  inconvertible  notes; 
but  it  does  so  by  lessening  the  quantity  of  them  in 
actual  circulation. 

Again,  if  a  doubt  should  spring  up  as  to  the  ability 
and  intention  of  the  issuing  government  to  maintain 
the  legal-tender  character  of  its  notes;  or  if,  as  was  the 
case  in  the  last  stages  of  the  Southern  Confederacy, 
the  continued  existence  of  the  government  itself  should 
become  doubtful,  the  notes  in  circulation  may  suffer  a 
great  depreciation,  or  even  lose  all  exchange  value.  The 
explanation  is  that  merchants  and  others  decline  to 
receive  them  any  more  for  goods.  They  prefer  to  keep 
their  stocks  unsold  rather  than  to  sell  them  for  notes 
which  may  become  valueless  on  their  hands. 

A  somewhat  similar  case  occurs  when  a  serious  in- 


188  Political  Economy. 

crease  of  these  notes  is  in  prospect,  even  where  no  doubt 
exists  as  to  the  ability  and  intention  of  the  government 
to  maintain  their  legal-tender  quality.  The  notes  already 
in  circulation  may  suffer  serious  depreciation,  even  be- 
fore any  of  the  new  issue  appear.  Holders  of  goods 
usually  raise  their  prices  at  once.  This  rise  makes  it 
impossible  to  sell  at  once  all  they  ought  ordinarily  to  be 
selling:  the  supply  of  currency  is  not,  at  the  moment, 
sufficient  to  maintain  prices  at  this  higher  level.  But 
the  impending  increase  of  currency  will  make  it  pos- 
sible presently  to  sell  the  whole  product  at  the  advance ; 
meanwhile  it  is  more  profitable  to  raise  prices  at  once, 
even  at  the  cost  of  diminished  sales,  than  to  sell  the 
whole  stock  at  the  former  prices. 

These  are  not  exceptions  to  the  general  principle  of 
prices.  They  are  rather  illustrations  of  its  working 
under  exceptional  conditions.  Whatever  the  currency 
of  a  country,  its  prices  must,  in  the  long  run,  conform 
to  the  demand  and  supply  of  that  currency. 

6.  An  Inflated  Currency  does  not  promote  Industry.— 
Many  persons  are  led  to  favor  the  use  of  inconvertible 
notes  by  a  mistaken  view  as  to  their  effects  on  trade. 
These  persons  start  out  with  the  assumption  that  plenty 
of  money  is  essential  to  prosperity.  As  inconvertible 
notes  can  easily  be  issued  in  any  desired  quantity,  they 
hold  that  this  form  of  currency  is  superior  to  every 
other,  and  ought  to  be  freely  used. 

Their  argument  rests  on  a  very  obvious  fallacy. 
"Abundance  of  money"  is  a  phrase  that  has  two  very 


Inflation  does  not  Make  Trade  Easier.          189 

different  meanings.  It  may  mean  a  large  quantity  of 
money  in  the  sense  of  a  great  many  dollars ;  or  it  may 
mean  a  large  supply  of  money  in  comparison  with  the 
demand  for  it,  —  in  comparison,  that  is,  with  prices. 

Money  may  be  abundant  in  the  first  sense  without 
being  so  in  the  second.  Obviously  it  is  only  abun- 
dance in  relation  to  prices  that  can  have  any  stimulat- 
ing effect  on  trade.  Increase  of  the  currency  has,  for 
a  little  while,  the  effect  of  making  things  sell  more 
rapidly.  It  creates  the  situation  spoken  of  in  Chap- 
ter XIII.,  §  10.  But  as  soon  as  prices  are  raised  to 
correspond  with  the  increase  of  money,  trade  becomes 
as  difficult,  and  money,  relatively  to  the  demand  for  it,  as 
scarce  as  it  was  before. 

The  more  dollars  we  have  in  circulation  the  less  each 
dollar  is  worth.  With  a  currency  of  ten  thousand  mil- 
lions it  would  be  as  easy  to  get  ten  dollars  as,  with  one 
of  a  thousand  millions,  it  would  be  to  get  one  dollar. 
But  ten  dollars  in  the  one  case  would  be  no  better  for 
a  man,  would  buy  no  more  things,  than  one  dollar  in 
the  other  case.  This  is  the  inevitable  result  of  increas- 
ing the  currency ;  it  raises  all  prices. 

While  the  increase  is  going  on,  it  tends,  no  doubt,  to 
quicken  the  sales  of  goods.  But  in  order  to  keep  up  the 
effect,  we  should  have  to  be  always  adding  to  the  issue.1 
This  was  amply  shown  in  the  inflation  period  of  our 

1  It  is  probable  that  even  this  would  lose  its  quickening  effect  before 
long.  People  would  soon  perceive  that  the  currency  was  gradually 
depreciating,  and  would  learn  to  allow  for  it  in  advance. 


190  Political  Economy. 

own  greenbacks.  Once  the  prices  of  things  had  time  to 
get  adjusted  to  the  increased  volume  of  currency,  the 
seeming  plentifulness  of  money  ceased.  Trade  was  never 
duller,  money  never  seemed  scarcer  than  during  parts  of 
the  period  when,  measured  by  the  number  of  dollars, 
we  had  a  great  abundance  of  currency.  Inflation  of  the 
currency  in  the  end  defeats  itself.  Besides  the  ruinous 
injustice  it  works,  it  ends  by  making  all  trade  more 
uncertain  and  difficult  than  it  is  on  the  more  solid  basis 
of  hard  money. 

The  permanent  difficulties  of  trade  are  not  at  all  due 
to  scarcity  of  money.  The  hard  thing  is  not  so  much 
to  sell,  as  to  sell  at  a  satisfactory  profit.  Now  the 
question  of  profit,  as  a  matter  of  selling,  turns,  not  on 
the  highness  or  lowness  of  prices,  but  on  the  relation 
between  prices  and  money  wages.  The  selling  price  of 
each  commodity  must  be  sufficiently  above  the  amount 
paid  out  in  wages  in  getting  it  produced,  to  give  the 
employers  and  dealers  a  profit  on  their  outlay.  In- 
crease of  currency  raises  prices,  but  in  the  long  run  it 
raises  money  wages  in  the  same  proportion.  It  therefore 
leaves  the  essential  difficulties  of  the  case  unchanged. 

7,  Notes  Secured  by  Pledge  of  Property. — Another  of 
the  erroneous  theories  relating  to  inconvertible  notes  is 
that  they  cannot  depreciate  in  value  if  they  are  secured 
by  the  pledge  of  property  of  some  kind.  It  is  a  favorite 
notion  with  currency  quacks  that  every  man  who  owns 
land  or  other  safe  property,  ought  to  be  allowed  to  mort- 
gage it  to  the  government  and  obtain  the  issue  of  legal- 
tender  notes  "  based "  upon  this  security. 


Notes  "based"  on  Property.  191 

The  fatal  defect  of  such  notes  is  that  very  few  of  the 
people  who  want  money  want  land.  Good  and  useful 
as  land  is,  it  cannot  be  moved  from  the  place  where  it 
lies.  Any  man  wishing  to  pay  a  debt  in  another  country 
could  not  send  land  to  pay  it.  If  he  took  some  of  the 
land  pledged  for  the  notes,  and  sold  it,  he  could  get  only 
notes  based  on  other  lands  as  payment,  —  which  would 
not  help  him  at  all. 

Again,  notes  secured  in  this  way  would  be  liable 
to  indefinite  overissue  and  depreciation.  We  need  in 
currency  notes  but  a  small  proportion  of  the  value  of  our 
land  and  other  durable  property.  As  soon  as  the  due 
limit  of  issue  was  passed,  a  general  rise  of  prices  would 
set  in,  —  lands  rising  in  price  as  well  as  other  things. 
By  the  time  the  issue  had  reached  in  amount  the  orig- 
inal valuation  of  the  lands,  these  might  have  risen  to 
five  or  ten  times  their  original  valuation.  At  this  raised 
valuation  each  piece  of  land  would  become  a  perfectly 
good  security  for  a  fresh  batch  of  notes.  So  it  would 
go,  until  by  repeated  inflations,  the  value  of  the  notes 
became  zero. 

There  is  only  one  safe  and  useful  form  of  circulating 
notes,  namely  those  that  are  in  the  first  place,  readily 
convertible  into  coin  from  day  to  day  at  the  option  of 
each  holder,  and  that  are,  in  the  second  place,  well 
secured  against  ultimate  failure  or  neglect  on  the  part 
of  the  issuer  to  keep  faith  with  the  public.  Many 
other  devices  have  been  tried,  but  they  have  always 
resulted  disastrously. 


192  Political  Economy. 

QUESTIONS    AND    EXERCISES. 

1.  How  do  changes  in  the  value  of   money  show  themselves? 
Why  are  such  changes   important?     How  do  changes  of  prices 
affect  the  production  of  gold? 

2.  How  does  the  supply  of   money  differ  from  the  supply  of 
other  things?     Wherein  is  the  demand  for  money  peculiar?    Dis- 
tinguish between  the  nominal  and  the  real  demand  and  supply. 

3.  When  a  sum  of  money  has  been  used  in  paying  for  goods  at 
retail,  what  determines  how  soon  it  may  be  similarly  used  again? 

4.  Show  that  the  circulating  period  is  not  the  same  for  all  parts 
of  the  currency. 

5.  Show  that  money  performs   two  distinct  functions  in   its 
circuit. 

6.  Suppose  two  countries  have  the  same  quantity  of  currency, 
and  the  same  amount  of  products  to  be  exchanged,  does  it  follow 
that  their  prices  must  be  alike?    Does  it  follow  that  they  need  the 
same  quantity  of  coin?  of  notes? 

7.  What  causes  the  appearance  of  general  overproduction  dur- 
ing periods  of  business  depression? 

8.  What  is  meant  by  saying  that  excess  of  money  looks  like  a 
deficiency  of  goods? 

9.  How  far,  or  in  what  respects,  is  the  value  of  gold  an  excep- 
tion to  the  general  laws  of  value? 

10.  How  is  it  shown  that  changes  in  the  current  production  of 
gold  have  little  effect  on  its  value? 

11.  WThat  are  the  comparative  advantages  of  the  two  forms  of 
bank  currency?     Show  that  the  proportion  of  each  is  largely  a 
matter  of  convenience  and  business  habits? 

12.  What  is  the  source  of  banking  profits  ? 

13.  What  limits  the  amount  of  bank  currency  in  each  country  ? 
What,  roughly,  is  the  proportion  of  bank  currency  to  coin  in  the 
United    States?     Show   that    if   all    notes    were    abolished,   the 
present  volume  of  deposits  could  not  be  maintained.     [Consider 
the  increased  demand  for  coin  as  pocket  money.] 


Questions  and  Exercises.  193 

14.  What  provisions  are  made  for  redeeming  the  notes  of  the 
National  Banks?    Is  there  any  security  for  the  payment  of  their 
depositors  ? 

15.  How  does  it  happen   that  the  silver  dollars  are  equal,  in 
exchange  value,  to  gold  dollars,  although  the  silver  they  contain 
is  worth  only  seventy  and  odd  cents  ?     Do  you  think  of  any  other 
cases  of  the  same  kind  in  our  present  currency  ? 

16.  How  is  it  shown  that  the  silver  in  the  Treasury  is  not  fill- 
ing the  place  of  a  true  specie  reserve  for  the  silver  certificates? 

17.  Why  is  the  double  standard  impossible  in  practice  ?     Illus- 
.trate  by  sketching  the  history  of  the  double  standard  in  the  United 
States: 

18.  What  are  the  advantages  of  using  both  gold  and  silver 
as  money?     How  can  both  be  kept  permanently  in  use  in  any 
country  ? 

19.  What  causes  the  market  value  of  gold  to  be  slow  in  con- 
forming to  its  natural  value? 

20.  Why  is  it  that  gold  has  strictly  no  price  ? 

21.  What  is  the  weak  point  in  the  scheme  known  as  Interna- 
tional Bimetallism? 

22.  Explain  the  present  provisions  of  our  laws  respecting  the 
coinage  of  silver,  including  the  silver  change. 

23.  What  are  the  characteristics  of  "  Inconvertible  Notes  "  as 
currency?     How  is  the  value  of  such  notes  fixed?    What  injus- 
tice arises  from  overissue  of  them? 

24.  Does  the  copious  issue  of  inconvertible  notes  make  money 
plentiful  and  trade  brisk? 

25.  What  is  to  be  said  regarding  the  use  of  inconvertible  legal- 
tender  notes  secured  by  a  pledge  of  property  ?    Could  such  notes 
depreciate  in  value? 


CHAPTEK    XVIII. 

WAGES  AND  PROFITS  CONSIDERED  AS  PORTIONS  OF  THE 
PRODUCT  OF  INDUSTRY. 

1.  Preliminary  Explanations.  —  We  now  enter  on  a  new 
branch  of  our  study.  We  have  seen  that  productive  in- 
dustry calls  for  two  kinds  of  exertion  or  sacrifice,  namely, 
labor  and  waiting.  We  have  already  noted  some  conse- 
quences of  the  fact  that  these  two  burdens  are,  in  the 
main,  borne  by  two  distinct  sets  of  men,  known  as  labor- 
ers and  employers.  We  must  now  inquire  how,  under 
this  separation  of  burdens,  the  industrial  rewards  of  the 
two  sets  are  respectively  determined. 

The  pay  of  hired  laborers  we  call  wages.  The  term 
includes  all  payments  for  services  of  any  kind ;  but,  for 
the  sake  of  simplicity,  we  shall  at  first  consider  only  the 
wages  of  productive  laborers. 

Further,  the  term  "  wages "  is  to  be  understood  in  the 
strict  sense.  We  have  to  do  here  with  hired  laborers 
only.  The  earnings  of  those  productive  laborers  who 
work  on  their  own  account  (e.  y.  small  farmers)  are  not 
strictly  wages.  Such  producers  have  their  product,  or 
the  things  received  in  exchange  for  it,  as  the  reward 
of  their  labor  and  waiting.  If  all  producers  worked  on 
this  basis,  we  should  have  no  need  of  a  theory  of  wages. 
194 


Wages  and  Profits.  195 


The  term  "product  of  industry"  is  to  be  understood 
as  referring  only  to  the  final  product,  —  the  finished  or 
enjoyable  commodities  that  are  desired  for  their  own 
sake.  It  does  not  include  machinery,  materials,  or  other 
things  that  are  useful  only  as  means  towards  producing 
enjoyable  commodities.  In  other  words,  we  are  to  re- 
gard industry  from  the  standpoint  of  its  ultimate  aim. 
The  labor  spent  in  producing  capital  is  to  be  regarded 
as  labor  spent  in  obtaining  the  enjoyable  things  that 
the  capital  helps  to  produce.  Those  things,  not  the 
capital  itself,  constitute  the  natural  reward  of  such 
labor.  (Chap.  XL  §  3.) 

In  our  first  study  of  wages  and  profits  we  shall  con- 
sider wages  in  the  mass,  —  the  aggregate  wages  of  the 
whole  body  of  hired  laborers.  In  the  case  of  profits,  also, 
we  consider  first  the  total  gains  of  the  whole  body  of 
employers.  Individual  wages  and  profits  we  shall  discuss 
later. 

The  whole  product  of  industry  completed  from  day  to 
day  belongs  to  the  employers.  Much  the  larger  part  of  it 
simply  replaces  to  them  the  wages  paid  out  in  getting 
it  produced.  The  rest  is  their  profit. 

Profits  are  not,  like  wages,  the  reward  of  a  single  kind 
of  exertion  or  sacrifice.  Employers  could  not  be  employ- 
ers without  a  large  fund  of  savings  wherewith  to  pay 
wages.  The  whole  capital  of  the  country,  so  far  as  it 
has  been  produced  by  hired  labor,  represents  savings 
invested  by  the  employers.  Profits  are,  in  part,  a  reward 
for  the  self-denial  involved  in  all  this  saving.  But, 


196  Political    Economy. 

secondly,  employers  are  themselves  productive  laborers 
of  a  high  order.  Industry  could  not  prosper  without 
their  services  in  planning  and  directing  the  work.  Their 
profits  reward  also  these  personal  labors  on  their  part. 

How  much  of  the  whole  mass  of  profits  comes  as  a 
reward  for  the  saving,  and  how  much  for  the  personal 
labors  of  the  employers,  cannot  be  discovered  with  pre- 
cision, because  there  is  nothing  in  the  result  itself  to 
show  this.  It  is  common,  however,  to  give  the  name 
of  Interest  to  the  portion  that  rewards  the  saving,  and  to 
assume  that  the  amount  of  it  is  shown  by  the  current 
rate  of  interest  on  loans'.  The  portion  that  rewards  their 
personal  labor  may  be  called  earnings  of  management, 
or  personal  earnings  of  employers.1 

We  make  no  account,  for  the  present,  of  the  fact  that 
the  natural  advantages  for  carrying  on  each  industry  are 
rarely  quite  alike  for  all  engaged  in  it.  Inequalities  of 
opportunity  give  rise  to  economic  rent,  which  will  form 
the  subject  of  a  later  chapter. 

2.  Wages  as  a  Part  of  the  Current  Product  of  Industry. — 
Wages,  as  we  all  know,  are  customarily  paid  in  money. 

1  The  whole  effort  to  draw  an  exact  line  between  the  two  portions 
of  profit  is,  in  ray  opinion,  entirely  futile.  If  employers  borrowed 
their  whole  investment  from  another  set  of  men,  there  would  be  a 
basis  for  exact  reckoning  in  «the  case.  Since  no  man  can  be  a  true 
employer  without  some  savings  of  his  own,  and  since  employers  as 
a  body  borrow  but  a  small  part  of  the  whole  amount  they  invest,  it 
would  seem  impossible  to  make  a  nice  distinction  between  the  two 
portions  of  their  profit.  It  is  like  the  attempt,  sometimes  made,  to 
distinguish,  in  the  products  of  industry,  the  portion  due  to  capital 
from  the  portion  due  to  labor.  Production  itself  knows  nothing  of 
either  distinction. 


The  Source  of  Wages.  197 

But  money  is  no  good  in  itself.  The  real  wages  of  labor 
consists  of  the  enjoyable  commodities  that  are  bought 
with  the  money.  Changes  of  money  wages  are  of  no 
consequence  except  so  far  as  they  imply  changes  of  real 
wages.  The  question  of  wages,  then,  is  what  determines 
the  quantity  of  enjoyable  commodities  the  laborers  are 
able  to  obtain,  week  by  week,  in  return  for  their  labor? 

Our  starting  point,  in  seeking  the  answer  to  this 
question,  must  be  the  fact  already  noticed,  that  the  hired 
laborers  own  no  part  of  the  enjoyable  products  of  labor 
awaiting  purchasers  As  a  rule,  also,  they  have  but 
little  to  offer  for  goods  but  their  own  labor.  Only  the 
more  thrifty  among  them  have  saved  anything.  Some 
small  amounts  are  ordinarily  owing  to  them  as  wages ; 
but  if  against  the  wages  due  we  set  off  what  they  owe 
merchants  and  owners  of  houses,  it  is  probable  that  the 
balance  in  their  favor  would  be  but  small. 

This  means  that,  for  their  services  in  producing  the 
good  things  now  awaiting  purchasers,  they  have,  as  a 
class,  been  paid  already.  If,  then,  they  are  to  receive 
any  considerable  part  of  these  things,  it  must  be  for 
producing,  or  helping  to  produce,  future  commodities. 
Secondly,  it  must  be  by  the  voluntary  action  of  those 
who  own  the  existing  supply  of  money  and  goods. 
Whatever  these  choose  to  consume  of  the  good  things 
already  on  hand,  they  have  full  power  and  legal  right 
to  consume.  Only  whatever  they  choose  to  spare  from 
their  own  consumption,  can  be  counted  on  for  the  la- 
borers. If  they  consume  freely  and  save  little,  wages 


198  Political  Economy. 


will  be  low ;  if  they  consume  little  and  save  much, 
wages  will  be  high. 

3.  Wages  and  the  Circulation  of  Money.  —  Wages  being 
paid  in  money,  the  question  how  great  a  part  of  the 
current  product  of  industry  is  to  go  to  the  laborers,  is 
decided  in  practice  by  the  use  made  of  the  money  em- 
ployers receive  for  the  things  they  sell.  When  a  person 
sells  anything,  he  may  use  the  money  received  for  it  in 
buying  commodities  for  his  own  consumption,  or  he  may 
save  it  for  use  in  business  with  a  view  to  profit.  If  he 
use  it  in  the  first  of  these  ways,  clearly  the  commodities 
he  buys  are  lost  to  wages :  the  laborers  cannot  also  have 
them. 

If  all  who  get  any  part  of  the  money  received  for  goods 
should  suddenly  abandon  the  habit  of  saving,  and  should 
use  to  the  full  extent  their  right  of  buying  things  for 
their  own  use,  there  would  be  nobody  to  hire  laborers 
any  more.  Wages  would  disappear.  The  whole  product 
of  industry  would  be  consumed  by  the  capitalist  class. 

If,  on  the  other  hand,  it  were  possible  that  all  the 
money  received  for  goods  should  be  devoted  to  hiring 
laborers,  the  whole  product  of  industry  would  in  that 
case  go  as  wages. 

Between  these  two  extremes,  whatever  proportion  of 
the  money  received  for  goods  at  retail,  is  saved  and 
applied  to  hiring  laborers,  that  proportion  of  the  total 
product  of  industry  is  thereby  designated  as  wages  of 
labor.  So  that  the  whole  matter  turns  on  the  question 
of  saving. 


Money  Wages  and  Real   Wages.  199 

The  student  will  find  it  helpful,  at  this  point,  to  recur 
to  the  diagram  on  page  134.  The  money  returning  to 
the  point  1  through  the  bulbs,  b,  e,  h,  I,  o,  is  the  portion 
of  the  whole  money-supply  used  in  hiring  laborers.  What- 
ever proportion  this  bears  to  the  whole  stream  of  money 
passing  the  point  1,  that  proportion  of  the  total  product 
of  industry  goes  to  the  laborers  as  wages.  Not,  however, 
it  must  be  remembered,  for  producing  these  same  com- 
modities, but  for  helping  to  produce  other  commodities 
that  are  yet  in  the  future. 

The  secondary  bulbs,  b',  e',  etc.,  remind  us  that  money 
received  as  wages  may  be  saved  and  become  wages  over 
again.  The  savings  thus  made  from  wages  by  skilled 
artisans,  members  of  the  learned  professions,  etc.,  consti- 
tute an  important  fraction  of  the  whole  mass  saved  year 
by  year.  Their  primary  effect  on  wages  is  to  alter,  not 
the  total  mass,  but  the  apportionment  of  the  total  mass. 
The  wages  of  the  other  laborers  are  greater  by  the 
amount  that  these  laborers  save.  Of  course,  those  who 
save  have  their  income  increased  later  by  the  amount 
their  savings  bring  them.  • 

It  is  evident  from  these  considerations  that  the  sum 
of  wages,  in  any  community,  must  depend  on  two  things : 
first  the  productiveness  of  the  community's  industry ;  and 
secondly,  the  strength  of  the  saving  spirit  among  those 
members  of  it  who  have  savable  income. 

If  the  productiveness  of  industry  be  given  and  con- 
stant, the  real  wages  of  the  laborers  will  depend  on  the 
second  of  the  two  factors ;  that  is  to  say,  on  the  propor- 


200  Political  Economy. 

tion  the  total  spendings  of  the  capitalist  classes  bear  to 
their  total  savings,  week  by  week.  Or,  stating  the  same 
principle  in  terms  of  our  diagram,  the  quantity  of  com- 
modities going  to  the  laborers  will  depend  on  the  ratio 
the  money  passing  through  the  wage-bulbs  bears  to  the 
whole  stream  of  money  offering  for  goods  at  1.  For 
example,  in  the  illustrative  case  given  on  page  136,  if 
forty  of  the  fifty  millions  constituting  the  weekly  supply 
of  money,  pass  through  b,  e,  h,  /,  and  o,  then  the  laborers 
receive  as  wages  four-fifths  of  the  weekly  product  of 
industry. 

4.  Saving's  not  Governed  by  any  Strict  Rule.  —  Since 
wages  depend  thus  directly  on  savings,  the  study  of 
wages  becomes  primarily  an  inquiry  into  the  practice  of 
saving.  If  we  could  discover  why  just  so  much  is  saved, 
we  should  have  solved  the  problem  of  wages.  But  here 
the  real  difficulties  of  the  case  begin.  The  question 
how  the  flow  of  savings  has  its  limits  fixed,  from  week 
to  week,  is  far  from  simple. 

Many  thousands  of  persons,  in  every  civilized  country, 
save  more  or  less  of  their  income.  But  the  cases  are 
probably  rare  in  which  two  persons  having  the  same 
income,  save  the  same  precise  part  of  it.  Even  one  and 
the  same  person  saves  a  larger  proportion  of  his  income 
at  one  time  than  at  another.  Some  save  with  a  definite 
object  in  view,  such  as  to  provide  for  their  children  or 
for  their  own  old  age,  or  to  carry  out  a  specific  object 
in  business.  Others  save  with  only  a  general  desire  to 
grow  richer,  and  still  others  because  they  have  a  greater 


Savings  not  Subject  to  Strict  Rules.  201 

income  than  they  care  to  spend  at  the  moment.  It  is 
very  clear  then  that,  as  saving  depends  on  the  free  choice 
of  each  individual  who  has  income  beyond  his  actual 
wants,  there  can  be  no  formula  or  uniform  rule  as  to 
savings.  We  cannot  say,  for  example,  that  if  the  pro- 
duct of  industry  be  increased  by  a  given  percentage, 
savings  will  be  increased  by  the  same  percentage.  Still 
less  can  it  be  assumed  that,  when  the  product  is  in- 
creased, the  whole  increase  will  be  saved.  We  can  only 
be  sure  that  increase  of  product  causes  increase  of  sav- 
ings. As  to  the  precise  amount  of  increase,  no  two 
persons  and  no  two  communities  would  be  likely  to 
behave  quite  alike  in  a  given  case. 

5.  General  Truths  Regarding  Savings  —  Yet  some  gen- 
eral principles  may  be  laid  down  in  regard  to  the  total 
savings  of  each  community,  and  the  fluctuations  to  which 
the  total  is  liable.  Some  persons  save,  no  doubt,  merely 
in  order  to  postpone  the  enjoyment  of  their  income. 
They  would  save  more  or  less  even  if  thereby 'they  could 
add  to  their  wealth  nothing  beyond  the  amount  actually 
saved.  But  the  amount  likely  to  be  saved  in  that  way 
would  fall  far  short  of  meeting  the  needs  of  the  laborers. 
Their  readiness  to  work  for  less  then  their  labor  eventu- 
ally produces,  gives  a  chance  to  make  savings  a  source  of 
income.  Most  of  the  savings  made  in  a  civilized  country 
are  made  with  a  view  to  taking  advantage  of  this  oppor- 
tunity. Even  those  who  would  save  something  without 
this  inducement,  save  more  because  of  it. 

This  being  so,  we  can  safely  assume  that  the  amount 


202  Political  Economy. 


of  savings  likely  to  be  made  in  any  given  community 
will  depend  largely  on  the  rate  of  profit  to  be  gained  by 
the  use  of  savings.  An  increase  of  profits  would  stimu- 
late those  who  save,  to  save  more  strenuously.  A  fall  of 
profits,  on  the  other  hand,  would  tend  to  check  their 
energy  in  saving. 

Again,  it  is  evident  that  much  depends  on  the  character 
and  temperament  of  those  in  each  community  who  have 
savable  income.  If  these  be  careless  about  the  future, 
fond  of  lavish  and  costly  enjoyments,  their  savings  are 
likely  to  be  meagre.  Profits  must  be  high  in  order  to 
induce  such  men  to  save  at  all.  On  the  other  hand, 
where  the  richest  members  of  the  community  are  men 
of  energetic  spirit  and  simple  tastes,  little  inclined  to 
luxurious  living  and  costly  indulgences,  a  large  proportion 
of  their  income  is  sure  to  be  saved  and  applied  to  indus- 
trial enterprises.  In  such  a  community  the  rate  of  profits 
may  be  comparatively  low  without  checking  the  flow  of 
savings.  Wages,  therefore,  may  be  steadily  high  in  com- 
parison with  the  productiveness  of  industry. 

6.  Bearing  of  these  Truths  on  Wages.  —  These  general 
truths  form  the  basis  of  our  reasonings  on  the  subject 
of  wages.  It  is  by  means  of  them  that  we  are  enabled  to 
explain  the  fundamental  relation  between  the  wages  of 
hired  laborers  and  the  product  of  their  labor. 

It  follows  from  them  that  there  is  in  every  commu- 
nity, at  any  given  time,  a  limit  to  the  amount  of  savings 
that  will  be  made  for  a  given  rate  of  profit.  If,  for  any 
reason,  profits  should  increase,  savings  may  be  expected 


Connection  between  Wages  and  Profits.  203 

to  increase  also ;  if  profits  decline,  savings  tend  to  fall 
off.  Again,  if  the  community  should  become  more  eager 
in  the  pursuit  of  riches,  more  ready  to  give  up  present 
enjoyment  for  the  sake  of  future  gain,  savings  may  be 
expected  to  increase  without  the  stimulus  of  higher 
profits.  If  the  people  should  become  less  thrifty,  less 
energetic  in  the  struggle  for  wealth,  savings  would  be- 
come less  in  amount  even  though  profits  should  remain 
as  high  as  before. 

The  effect  on  wages  of  a  change  in  the  volume  of 
savings  is  too  obvious  to  need  remark,  seeing  that  sav- 
ings must  become  wages  in  order  to  gain  a  profit.  But 
it  is  necessary  to  observe  that  changes  of  wages,  the  pro- 
ductiveness of  industry  remaining  the  same,  are  followed 
in  turn  by  changes  in  the  rate  of  profit.  The  profits  of 
the  employers  in  any  given  mass  of  product,  consist  of  its 
excess  over  the  wages  paid  out  in  getting  it  produced. 
The  less  the  wages  were  the  greater  the  profit  is.  If, 
therefore,  wages  should  fall,  the  productiveness  of  indus- 
try being  unchanged,  profits  must  become  greater  than 
before.  Unless  those  who  have  savable  income  have 
become  less  ready  to  save  than  formerly,  this  increase  of 
profits  must  evoke  increase  of  saving  and  restore  wages 
to  the  former  level.  And  similarly,  if  wages  should  rise 
without  increase  of  product,  the  resulting  decline  of 
profits  would  check  the  flow  of  savings  and  thus  cause 
wages  to  decline  again. 

7.  Normal  Wages  and  Profits. — It  follows  that  we  have, 
in  the  case  of  wages  and  profits,  much  the  same  kind  of 


204  Political  Economy. 

adjusting  process  as  takes  place  in  settling  the  general 
level  of  prices.  When,  at  any  given  level  of  wages,  the 
corresponding  rate  of  profit  causes  men  to  save  more  of 
their  income  than  is  needed  to  pay  these  wages,  the  gen- 
eral level  of  wages  will  tend  to  rise,  and  the  general 
rate  of  profits  tend  to  decline.  On  the  other  hand,  when 
the  rate  of  profit  resulting  from  any  given  level  of  wages 
does  not  induce  men  to  save  enough  to  pay  these  wages, 
the  general  rate  of  wages  will  tend  to  fall  and  the  rate 
of  profits  to  rise. 

There  is  therefore  for  every  community,  at  any  given 
time,  a  normal  level  of  wages  and  of  profits,  to  which 
current  (or  market)  wages  and  profits  tend  to  conform. 
Wages  are  at  their  normal  level  when  the  correspond- 
ing rate  of  profit  induces  men  to  save  enough,  and  only 
enough,  to  pay  these  wages.  When  wages  are  at  the 
normal  level,  profits  are  at  the  normal  rate.  Normal 
wages  and  profits  go  together;  it  is  simply  a  case  of 
equilibrium. 

The  question  whether  normal  wages  shall  be  high 
or  low  in  any  community  will  depend,  as  already  indi- 
cated, on  two  things:  first,  the  productiveness  of  the  com- 
munity's industry ;  secondly,  the  strength  of  the  saving 
spirit  among  those  who  own  the  products  of  its  industry. 
Both  of  these  factors  are  subject  to  change ;  a  change 
of  either  would  bring  a  change  in  the  normal  level  of 
wages.  If,  for  example,  the  existing  capital  of  the 
country  should  be  inherited  by  a  class  of  men  much 
less  inclined  to  save  than  the  present  owners  of  it,  the 


Normal  Wages  and  Profits.  205 

normal  level  of  wages  would  inevitably  decline.  Again, 
if  the  laborers  should  become  more  diligent,  more  ener- 
getic, and  more  anxious  to  make  the  product  of  industry 
as  great  as  possible,  normal  wages  would  rise;  for  in- 
crease of  product  is  sure  to  evoke  increased  savings. 

The  normal  level  of  profits  depends  primarily  on  the 
character  of  those  who  have  savable  income.  But  it 
also  depends  somewhat  on  the  amount  of  income  there 
is  which  may  be  easily  spared.  The  larger  the  fixed 
capital  of  a  country  is  in  proportion  to  its  population, 
the  lower  is  its  normal  rate  of  profits  likely  to  be.  For 
the  greater  its  fixed  capital,  the  greater,  at  any  given 
rate,  will  the  total  mass  of  profits  be,  —  the  greater,  that 
is  to  say,  will  the  total  income  of  its  capitalists  be. 

Now  it  is  much  easier  to  save  out  of  a  large  income 
than  out  of  a  small  one.  A  man  who  has  a  very  large 
income  can  hardly  spend  more  than  a  fraction  of  it  on 
himself  without  a  ridiculous  and  offensive  display  of  his 
wealth.  Great  incomes  are  therefore  distinctly  favorable 
to  great  savings.  Even  though  the  rate  of  profits  should 
be  declining,  the  men  whose  profits  are  reckoned  on 
millions  of  dollars'  worth  of  capital,  can  easily  save 
enough  every  year  to  add  greatly  to  their  wealth.  Such 
men  have  no  further  need  of  saving;  but  they  seem  to 
save  as  eagerly  for  the  mere  delight  of  carrying  out 
great  industrial  enterprises,  as  other  men  do  under  the 
spur  of  actual  need.  Some  of  them,  we  may  hope,  are 
also  stimulated  by  the  desire  to  benefit  their  fellow-men 
by  the  intelligent  use  of  their  wealth, 


206  Political  Economy. 

The  normal  rate  of  profits  tends,  therefore,  to  decline 
as  a  country  grows  in  fixed  capital,  especially  where  this 
becomes  concentrated  in  the  hands  of  a  few  men  of  great 
industrial  ambition.  The  benefit  accrues  to  the  laborers. 

8.  Wages  Influenced  by  Past  Savings,  —  While  wages, 
at  any  given  time,  depend  directly  on  contemporary  sav- 
ings, it  is  easy  to  see  that  they  are  also  greatly  influenced 
by  past  savings.  We  have  just  seen  that  a  high  propor- 
tion of  fixed  capital  to  population  is  favorable  to  high 
wages,  by  reason  of  its  tendency  to  lower  the  normal  or 
necessary  rate  of  profits. 

But  there  is  a  much  more  important  sense  in  which 
such  capital  affects  wages.  It  acids  enormously  to  the 
productiveness  of  industry.  It  has  therefore  a  double 
tendency  to  raise  wages :  first,  by  increasing  the  yield  of 
labor,  and  secondly,  by  causing  a  higher  proportion  of 
the  total  yield  to  be  used  as  wages. 

Now  the  fixed  capital  of  the  present  time  is  mainly 
a  result  of  the  savings  of  past  years.  The  general  body 
of  laborers  would  probably  never  have  been  willing  to 
work  for  a  return  so  distant  as  such  capital  offers.  Men 
who  have  always  spent  as  rapidly  as  they  have  earned, 
would  scarcely  have  faced  the  long  waiting  for  reward 
that  is  necessary  in  opening  mines,  preparing  land  for 
tillage,  constructing  factories,  warehouses,  ships,  rail- 
ways, etc.  Nothing  but  the  offer  of  wages  could  have 
induced  most  of  them  to  take  part  in  such  'undertakings. 

The  great  industrial  improvements  of  past  years  woiv, 
therefore  made  possible  by  the  foresight  and  self-denial 


Influence  of  Past  Savings  on  Wages.  207 

of  those  who  supplied  the  savings  necessary  to  pay  the 
laborers  for  making  them.  The  great  addition  these 
improvements  have  made  to  the  product  of  present  in- 
dustry goes  mainly  to  the  laborers.  Their  first  effect, 
no  doubt,  was  to  increase  the  gains  of  the  employers ; 
but  the  higher  profit  so  gained  led  to  a  rapid  increase  of 
savings  and  consequent  increase  of  the  total  volume 
of  wages. 

We  see,  then,  that  -  in  any  country  where  the  spirit 
of  saving  is  strong,  and  has  been  strong  for  several 
generations,  two  important  consequences  result  from  it 
for  the  present  volume  of  wages.  In  the  first  place, 
the  labor  of  the  country  is  used  in  the  ways  that  afford 
the  largest  returns ;  every  known  device  for  adding 
to  its  productiveness  at  the  cost  of  longer  waiting,  is 
utilized  to  the  fullest  extent.  In  the  second  place,  the 
stronger  the  spirit  of  saving  at  the  present  time,  the 
greater  is  the  proportion  of  this  enlarged  product  going 
to  form  the  wages  of  hired  laborers. 

The  effect  of  sustained  saving  on  the  general  wealth 
of  a  community  is  too  obvious  to  need  extended  com- 
ment. Saving  is,  in  more  ways  than  one,  the  mother  of 
riches.  The  countries  that  have  been  notable  for  the 
saving  spirit  of  their  people  are  now  the  wealthy  coun- 
tries of  the  world.  Eeadiness  to  save  usually  goes,  no 
doubt,  with  a  readiness  to  exert  one's  self  in  other  ways. 
The  countries  where  savings  are  large  are  generally 
countries  where  the  people  are  industrious  as  well  as 
thrifty.  But  savings  are  riecessary  in  order  that  labor 
may  be  used  effectively, 


208  Political  Economy. 

Without  both  industry  and  thrift  a  community  remains 
poor,  even  though  surrounded  by  overflowing  natural 
wealth.  On  the  other  hand,  dilligence  and  economy 
create  riches  even  in  the  face  of  great  obstacles.  New 
England  has  but  few  natural  advantages  for  production. 
The  materials  for  its  industries,  and  the  food  for  its  in- 
habitants, have  very  largely  to  be  brought  in  from  other 
places.  But,  in  spite  of  these  disadvantages,  the  accumu- 
lated wealth  of  its  people  is  greater  than  that  of  many 
highly-favored  countries :  and  there  are  few  places  where 
the  wages  of  labor  are  so  high.  It  is  a  striking  illustra- 
tion of  the  power  of  sustained  saving,  coupled  with  the 
industrious  spirit. 

9.  The  Rate  of  Profits  hard  to  Discover  in  Practice.— 
The  relation  of  profits  to  wages  is  simple  enough  as  a 
matter  of  theory.  We  say  that  the  amount  of  profit  con- 
tained in  the  product  of  industry  completed  each  day  or 
each  week,  is  the  excess  of  the  product  over  the  wages 
paid  out  in  getting  it  made.  The  wages  (i.  e.  the  real 
wages)  consisted  of  a  certain  mass  of  food,  clothing,  and 
other  commodities.1  The  product  consists  of  a  certain 
greater  mass  of  similar  commodities  produced  in  return 
for  the  wages.  The  difference  between  the  two  must 
therefore  be  profit  for  the  employers. 

This  is  quite  true,  and  it  is  highly  important  to 
see  quite  clearly  that  this  excess  of  product  over  the 
real  wages  paid  in  producing  it  is  the  only  source  of  real 

1  These  constitute  the  real  cost  to  the  employers  of  the  things 
produced  by  hired  labor. 


The  Rate  of  Profit  hard  to  Discover.  209 

profit  in  business.  '  Yet  a  little  reflection  shows  us  that 
it  would  be  very  hard  to  discover  with  exactness  how 
great  a  part  of  each  week's  product  is  profit,  and  how 
much  is  merely  replacement  of  the  savings  expended 
in  getting  it  produced. 

The  wages  paid  out  by  the  employers,  first  and  last, 
in  the  production  of  the  commodities  completed  in  any 
given  week,  were  not  paid  out  in  any  one  previous  week. 
The  expenditure  was,  in  fact,  spread  over  months  and 
even  years.  It  was  so  intimately  blended,  at  many 
points,  with  the  cost  of  the  products  of  other  weeks 
that  no  exact  separation  is  possible. 

That  large  part  of  the  employers'  cost  which  con- 
sisted of  wages  paid  for  clearing  land,  opening  mines, 
constructing  and  repairing  buildings,  machinery,  rail- 
ways, etc.,  —  in  a  word,  the  whole  industrial  plant  of  the 
country,  cannot  be  accurately  apportioned  to  any  given 
mass  of  finished  products.  Savings  expended  for  the 
more  durable  forms  of  capital  are  replaced,  not  in  a 
lump  sum,  but  by  a  series  or  stream  of  small  instalments 
running  as  long  as  the  capital  lasts. 

Now  the  employers  can  seldom  foretell  with  accuracy 
how  long  each  part  of  their  productive  apparatus  is  going 
to  last,  or  what  repairs  it  will  need.  Any  portion  of  it 
may  wear  out  sooner,  or  may  last  longer,  than  they  can 
now  foresee.  Every  part  of  it  is  liable  to  be  superseded 
and  made  valueless  at  any  time,  by  the  invention  of 
better  devices  or  methods.  They  cannot  tell  how  much 
more  their  existing  apparatus  will  eventually  yield. 


210  Political  Economy. 

They  therefore  cannot  tell  with  precision  how  much  of 
the  original  labor  of  making  it  is  chargeable  to  a  given 
mass  of  product.  It  follows  that  they  cannot  say  with 
accuracy  how  much  of  each  week's  product  of  industry 
is  to  be  set  down  as  replacement  of  the  wages  spent  in 
obtaining  it.  And  if  they  cannot  tell  exactly  how  much 
it  has  cost  them,  of  course  they  cannot  tell  exactly  how 
much  their  profit  is. 

The  difficulty  of  ascertaining  the  exact  proportion 
of  profits,  in  any  given  mass  of  completed  product,  is  no 
reason  for  doubting  whether  there  be  an  exact  relation 
between  wages  and  profits.  The  trouble  arises  in  dealing 
with  limited  portions  of  the  product  arising  from  each 
investment  of  savings.  The  account  cannot  be  closed 
and  the  balance  struck  until  the  investment  itself  has 
yielded  its  whole  return.  Since,  in  the  long  run,  nearly 
all  forms  of  capital  do  yield  their  final  return,  the  pro- 
portion of  profit  in  each  week's  product  does  eventually 
disclose  itself  with  almost  scientific  accuracy. 

Of  course  every  business  man  keeps  accounts,  which 
are  supposed  to  show  how  much  profit  he  is  making. 
But  the  result  is  only  approximate.  The  reckoning  of 
his  profits  for  any  period  is  based,  in  large  part,  on  the 
estimated  value  of  his  buildings,  machinery,  stock,  etc.,  as 
they  stand  at  the  beginning  and  again  at  the  end  of  the 
period.  This  may  answer  well  enough  for  practical  pur- 
poses ;  but  it  is  only  an  estimate.  It  may  later  prove  to 
have  been  based  on  much  too  high  or  too  low  an  opinion 
of  the  productive  power  still  left  in  the  fixed  capital 


Wages  and  Profits  not  Distinct  "Shares."        211 

10.  Wages  not  Found  by  Deducting  Profits,  —  It  is 
obvious,  from  the  facts  of  the  case,  how  great  an  error 
is  made  by  those  who  assume  that  wages  and  profits,  as 
parts  of  the  product  of  industry,  are  exclusive  of  each 
other,  and  that  if  the  profits  be  deducted,  the  residue 
will  be  the  portion  going  to  the  laborers  as  wages. 

Considered  as  contemporary  portions  of  the  product  of 
industry,  wages  and  profits  are  not  at  all  complements 
of  each  other.  They  arise  from  radically  different  ways 
of  dividing  the  product. 

If  from  the  whole  product  you  take  away  the  part 
that  is  profit,  the  remainder  is  not  wages  but  replace- 
ment of  the  past  savings  expended  in  getting  the  product 
made.  The  complement  of  your  profit  is  the  outlay  made 
in  order  to  gain  the  profit. 

On  the  other  hand,  if  you  take  away  the  part  that  is 
to  go  as  wages,  the  remainder  is  not  profit,  but  that  por- 
tion of  the  product  which  the  capitalist  class  are  to  con- 
sume in  their  own  enjoyment.  The  complement  of  what 
is  saved  is  what  is  spent. 

The  portion  wages  may  therefore  overlap  the  portion 
profit  to  an  indefinite  extent.  It  does  in  fact  overlap  it, 
whenever  a  capitalist  saves  any  part  of  his  profit.  The 
sum  of  wages  and  profits  in  any  given  product  may 
therefore  greatly  exceed  the  product.  It  follows  that 
wages  cannot  be  discovered  by  deducting  profits  from 
the  product. 


CHAPTEE   XIX. 

WAGES   OP   INDIVIDUAL   LABORERS. 

1.  Factors  on  which  Market  Wages  Depend.  —  Since 
the  whole  volume  of  savings  is  shared  among  the  pro- 
ductive laborers  who  work  for  hire,  it  is  clear  that  each 
man's  share  depends  on  two  factors:  first,  the  amount 
of  savings  to  be  invested,  and  secondly,  the  number  of 
laborers  to  be  hired.  Any  change  in  either  of  these 
factors,  without  a  corresponding  change  in  the  other, 
must  raise  or  lower  the  general  level  of  individual  wages. 
If  the  number  of  laborers  be  increased,  or  the  flow  of 
savings  grow  less,  wages  must  tend  to  fall.  If  the 
number  of  laborers  grow  less,  or  the  flow  of  savings 
increase,  wages  must  tend  to  rise. 

When  the  number  of  laborers  in  a  country  is  in- 
creased, the  new-comers  begin  at  once  to  share  in  the 
savings  offering  for  labor,  but  they  do  not  at  once  add 
correspondingly  to  the  means  of  saving.  This  lies  •  in 
the  nature  of  production,  so  long  a  time  being  necessary 
for  producing  most  of  the  commodities  of  which  real 
wages  consist. 

The  case  is  obscured,  in  practice,  by  the  mingling  of 
the  new  laborers  with  the  old.  If  the  new  laborers 
were  set  at  work  separately,  without  disturbing  in  any 


Changes  of  Market    Wages.  213 

way  the  course  of  industry  among  the  others,  then  it 
would  be  clear  that  the  first  use  of  their  labor  must 
be,  not  to  add  to  the  food,  clothing,  and  other  commodi- 
ties available  for  paying  their  wages,  but  to  provide  the 
three  forms  of  additional  capital  necessary  for  enabling 
them  to  produce  such  commodities. 

The  mixing  up  of  the  new  laborers  with  the  old  can- 
not alter  this  essential  feature  of  the  case,  though  it 
greatly  complicates  the  study  of  it.  We  may  be  sure 
that  it  is  still  true  that  the  presence  of  the  new  labor- 
ers involves,  as  its  first  effect,  the  production  of  in- 
creased capital  rather  than  the  production  of  increaseu 
commodities.  The  product  of  industry  cannot  be  in- 
creased in  less  time  than  commodities  can  be  produced; 
the  increase  must  be  built  up  from  the  foundations.  It 
is  therefore  a  necessity  of  the  case  that  a  considerable 
period  must  elapse  before  the  new  laborers  can  add  their 
full  quota  to  the  enjoyable  products  of  industry. 

In  the  meantime,  whatever  they  receive  as  wages 
must  be  drawn  from  the  products  of  other  labor,  and 
must  be,  at  least  in  part,  taken  from  savings  that  would 
otherwise  have  gone  to  the  original  laborers.  I  say  "in 
part,"  because  the  general  fall  of  wages  resulting  from 
the  increase  of  laborers  seeking  employment,  would  open 
a  prospect  of  higher  profits  from  the  investment  of  sav- 
ings. This  would  probably  give  rise  to  more  strenuous 
saving  on  the  part  of  those  having  spare  income,  and 
would  thus  increase  the  volume  of  savings,  even  before 
the  new  laborers  began  to  add  appreciably  to  the  stream 


214  Political  Economy. 

of  enjoyable  commodities  available  for  use  in  paying 
wages.  The  consequence  would  be  that  wages  would 
not  fall  in  as  great  a  ratio  as  the  number  of  laborers 
had  been  increased. 

In  the  converse  case  of  a  sudden  decrease  of  laborers, 
wages  would  rise,  but  not  necessarily  in  the  same  ratio 
as  the  laborers  are  diminished.  The  flow  of  savings 
seeking  investment  may  be  checked  because  of  the  les- 
sened chance  for  making  profits.  Again  the  temporary 
check  of  investment  during  periods  of  business  depres- 
sion, implies  diminished  earnings  for  the  laborers  as  a 
body.  On  the  other  hand,  when  business  revives  again, 
wages  may  rise  for  a  time  above  their  ordinary  level: 
the  amounts  held  back  from  investment  during  the  de- 
pression are  then  brought  forward  to  be  offered  for 
labor,  in  addition  to  the  current  savings  of  the  time 
itself.  These  are  obviously  not  exceptions  to  the  prin- 
ciple that  wages  depend  on  the  ratio  of  savings  to  the 
number  of  laborers.  They  are  rather  illustrations  of  its 
working  under  changing  conditions.  No  circumstance 
can  affect  the  rate  of  wages  in  a  community  except  by 
first  altering  this  ratio. 

2.  Classes  of  Laborers.  —  The  general  rule  of  market 
wages  just  given  for  the  general  mass  of  laborers,  holds 
true  also  for  the  members  of  each  group  or  class  into 
which  the  whole  body  is  divided.  The  rate  of  pay  for 
each  kind  of  labor  depends  on  the  demand  for  it  as 
compared  with  the  supply.  If  the  number  offering  any 
kind  of  labor  increase,  without  increase  in  the  amount  of 


How  Competition  affects    Wages.  215 

savings  offered  for  that  kind  of  labor,  the  rate  of  pay  for 
it  falls ;  and  vice  versa.  This  fall  (or  rise)  in  the  wages 
of  particular  classes  or  groups  of  laborers  may  take  place 
without  disturbing  the  general  level  of  wages. 

Probably  we  should  all  agree  that  the  fair  rule  of 
relative  wages  would  be  to  make  the  wages  of  each 
occupation  proportional  to  the  quantity  of  labor  and 
other  sacrifice  it  involves.1  There  is,  however,  no  stand- 
ard for  measuring  the  quantity  of  labor  and  other  sacri- 
fice involved  in  each  occupation,  except  the  one  afforded 
by  the  conduct  of  the  laborers  themselves  in  choosing 
occupations.  This  brings  us  to  the  fundamental  prin- 
ciple governing  differences  of  wages  in  different  occupa- 
tions, namely,  the  greater  or  less  activity  of  free  com- 
petition. 

If  every  laborer,  in  choosing  his  occupation,  were  able 
to  choose  it  freely,  with  sole  reference  to  his  own  inter- 
est and  desire,  differences  of  wages  could  not  be  perma- 
nent, except  where  they  correspond  to  real  differences  in 
the  character  of  occupations.  For  we  may  safely  assume 
that  laborers  have  at  least  the  wish  to  do  the  best  they 
can  for  themselves;  that,  therefore,  if  they  had  full  free- 
dom of  choice,  they  would  ordinarily  choose  the  occupa- 
tions that  seemed  to  offer  highest  wages  in  comparison 
with  the  whole  sacrifice  demanded.  This  would  be  the 
state  of  things  known  as  freedom  of  competition. 

3.   Erroneous   View  of   Competition.  —  It  is  a  common 

1  The  student  must  bear  in  mind  the  meaning  of  "  quantity  of 
labor."  See  Chap.  XI. 


216  Political  Economy. 

error  to  regard  competition  as  a  force  which  tends  to 
depress  all  wages,  profits,  and  prices,  and  in  fact  every- 
thing that  comes  under  its  influence. 

If  competition  had  the  tendency  this  view  attributes 
to  it,  then  clearly  wages,  profits,  and  prices  must  long 
since  have  been  reduced  to  zero,  for  competition  has 
always  been  more  or  less  active  among  men.  This 
consideration  alone  ought  to  be  enough  to  show  how 
mistaken  the  view  is. 

The  mistake  arises  from  looking  only  at  one  side  of 
the  case.  Competition  has  no  power  either  to  raise 
or  to  depress  all  wages,  or  all  profits,  or  all  prices.  In 
the  case  of  prices  we  have  already  seen  that  its  sole 
tendency  is  to  establish  uniformity,  to  prevent  one  pro- 
ducer from  getting  a  higher  price,  or  from  having  to 
put  up  with  a  lower  price,  than  other  producers  are 
getting  for  the  same  article.  How  high  or  low  all 
prices  of  commodities  shall  be,  depends  on  the  demand 
and  supply  of  money,  —  a  matter  over  which  competition 
has  no  control. 

Similarly  in  the  case  of  wages,  competition  has  noth- 
ing to  do  with  fixing  the  general  level.  It  simply  tends 
to  remove  inequalities  that  do  not  rest  on  differences 
in  the  labor  performed.  In  a  state  of  full  competition, 
laborers  would  avoid  employments  in  which  wages  hap- 
pened to  be  low  in  proportion  to  the  labor  exacted,  and 
would  choose  those  in  which  the  wages  were  high.  This 
action  on  their  part  would  cause  wages  to  rise  in  the 
one  set  of  employments,  and  to  fall  in  the  other  set, 


Competition  only  a  Leveller:  217 

until  a  condition  of  equality  were  reached.  The  same 
principle  would  apply  to  the  case  of  employers  offering 
different  rates  of  pay  for  the  same  or  similar  kinds  of 
labor;  no  one  employer  could  obtain  laborers  except 
on  the  condition  of  paying  them  as  high  wages  as  any 
other  employer  was  ready  to  pay  them. 

Competition  tends,  no  doubt,  to  lower  wages  wherever 
they  are  above  the  common  level ;  but  it  equally  tends 
to  raise  wages  wherever  they  are  below  the  common 
level.  It  is  simply  the  principle  of  each  man's  doing 
the  best  he  can  for  himself  by  all  fair  and  honorable 
means.  The  laborer  acts  in  free  competition  when  he 
goes  where  he  can  get  highest  wages.  The  employer 
does  the  same  when  he  gets  all  the  labor  he  can  for 
his  savings.  The  tendency  of  both  efforts,  taken  to- 
gether, is  not  to  raise  or  lower  all  wages,  but  to  create 
uniformity  in  wages. 

Freedom  of  competition  surely  destroys  nothing.  All 
that  men  produce  they  have  as  the  reward  of  their  labor 
and  waiting,  —  competition  or  no  competition.  All  that 
the  saving  classes  save,  the  hired  classes  receive  as 
wages,  whether  with  or  without  competition.  This  is 
all  they  can  in  any  case  receive ;  freedom  of  competi- 
tion affects  only  the  mode  of  sharing  it  among  them. 

4.  Temporary  Obstructions  to  Competition.  —  Under 
division  of  labor,  the  wages  and  profits  of  each  industry 
depend  on  the  value  of  the  product.  When  the  market 
value  of  the  product  rises  above  its  natural  value,  the 
first  effect  is  to  raise  the  profits  of  the  employers.  Under 


218  •          Political  Economy. 

the  stimulus  of  the  higher  profit,  additional  savings  are 
attracted  into  the  business,  and  the  increased  demand 
for  laborers  qualified  to  produce  the  commodity  causes 
their  wages  to  rise. 

In  the  same  way,  when  the  market  value  of  a  com- 
modity falls  below  its  natural  value,  the  first  effect  is 
a  fall  of  profits  for  the  employers  who  produce  it.  But 
the  fall  of  profits  causes  less  savings  to  be  invested  in 
producing  the  commodity.  As  a  result,  the  wages  of 
the  laborers  in  the  industry  fall.1 

Now  if  laborers  could  change  their  occupations  quickly, 
these  changes  of  wages  would  be  slight  and  of  short  dura- 
tion. But  here  we  come  on  one  of  the  many  obstructions 
to  perfect  freedom  of  competition.  Changes  of  employ- 
ment are  not  easily  made.  Every  occupation,  above  the 
very  rudest  and  most  elementary,  requires  some  degree 
of  training  and  special  knowledge.  A  change  means 
forfeiture  of  the  skill  already  acquired,  and  loss  of  time 
in  learning  a  new  kind  of  work.2 

Rather  than  incur  the  loss  and  trouble  of  changing, 
men  usually  persevere  in  their  old  calling,  even  under 

1  To  the  extent  of  the  difference  between  producing  at  high  pressure 
and  producing  at  low  pressure,  the  change  of  demand  for  labor  in  any 
industry  may  take  place  at  once.    In  the  industries  using  a  great  deal 
of  fixed  capital,  the  change  cannot  well  exceed  these  limits  in  any 
brief  space.     Even  this,  however,  is  enough  to  make  a  serious  differ- 
ence for  the  laborers. 

2  The  concentration  of  single  industries  in  particular  towns  in- 
creases greatly  the  difficulty  of  changing  employments.     Laborers 
who  would  change  must  move  to  another  town  in  addition  to  making 
the  sacrifice  spoken  of  in  the  text. 


Obstacles  to  Free  Competition.  219 

reduced  wages.  In  the  main,  the  re-adjustment  of  wages 
has  to  be  brought  about  through  the  choice  of  occu- 
pations made  by  the  new  laborers  who  are  constantly 
coming  forward.  These  can  mostly  be  counted  on  to 
choose,  among  the  industries  open  to  them,  those  that 
offer  best  wages.  By  their  action  it  is  that  the  supply 
of  labor  in  each  industry  is  eventually  adjusted  to  the 
demand,  and  wages  are  made  to  have,  or  tend  to  have, 
only  such  differences  as  correspond  to  permanent  differ- 
ences in  the  quantity  of  labor  involved. 

We  thus  see  that  competition  among  the  laborers  acts 
somewhat  slowly ;  also  that  the  length  of  time  necessary 
for  bringing  the  market  value  of  each  commodity  into 
agreement  with  its  natural  value,  is  the  length  of  time 
necessary  for  bringing  the  market  wages  of  its  producers 
to  the  level  of  other  wages. 

5.  Permanent  Obstacles  to  Free  Competition.  —  Freedom 
of  competition  implies  that  the  choice  of  occupations 
shall  be  made  without  constraint  or  compulsion.  It  is 
not  indeed  necessary  that  this  shall  be  so  in  every  case, 
since  all  occupations  must  have  some  recruits.  If,  when 
any  industry  happened  to  have  a  comparative  deficiency 
of  laborers,  a  sufficient  number  could  come  into  it  to 
restore  the  equilibrium,  that  would  be  enough  to  keep 
all  wages  under  the  equalizing  influence  of  competition. 

We  know,  however,  that  even  this  condition  is  not 
fulfilled  in  practice.  The  range  of  free  competition  is 
limited  and  checked  by  a  great  variety  of  circumstances. 
These  may  be  classified,  in  the  main,  under  three  heads : 


220  Political  Economy. 

First,  those  that  are  local  in  their  nature.  Here  the 
obstacle  to  competition  is  distance,  with  all  that  this 
implies :  cost  of  travelling,  the  trouble  of  finding  employ- 
ment among  strangers,  reluctance  to  leave  home  and 
friends,  etc.  These  local  impediments  are  greatly  inten- 
sified by  the  differences  of  climate,  language,  and  religion 
which  prevail  in  the  world.  The  contrasts  of  wages  be- 
tween countries  are  very  striking.  In  Japan,  for  exam- 
ple, wages  are  hardly  one-fourth  as  high  as  in  the  United 
States.  Even  in  Europe,  they  are  not  much  more  than 
half  as  high  as  in  our  country.  If  it  were  a  simple 
and  easy  matter  for  laborers  to  move  from  one  coun- 
try to  another,  these  wide  contrasts  in  wages  could  not 
last. 

In  the  second  place,  there  are  obstacles  to  free  com- 
petition growing  out  of  the  need  of  much  longer  training 
for  some  employments  than  for  others.  This  point  has 
already  been  spoken  of  in  connection  with  the  value  of 
products  of  skilled  labor  (Chap.  XII.,  §  3).  The  princi- 
ple is,  however,  of  much  wider  application  than  could 
be  shown  in  connection  with  value.  A  considerable  pro- 
portion of  the  occupations  demanding  long  preparation 
have  no  specific  products,  being  connected  with  trans- 
portation, exchange,  banking,  the  learned  professions,  etc. 
Further,  there  is,  strictly,  no  commodity  wholly  produced 
by  skilled  labor,  nor  is  there  any  wholly  produced  with- 
out it.  The  so-called  products  of  skilled  labor  are  merely 
those  into  the  production  of  which  such  labor  enters 
most  largely.  Even  if  skilled  labor  entered  equally  into 


Inequalities  of  Wages.  221 

all  production,  in  which  case  it  would  have  no  effect  on 
values,  the  scarcity  of  it  would  still  cause  its  remu- 
neration to  be  high.  It  is  scarce  only  because  the  cost  of 
long  training  acts  as  a  permanent  barrier  to  freedom 
of  competition. 

Thirdly,  many  obstacles  to  free  competition  arise  from 
the  fact  that  many  occupations  call  for  natural  gifts  of 
mind  or  body  that  the  great  mass  do  not  possess.  Any 
employment  that  requires  native  intelligence,  quickness 
of  discernment,  artistic  instinct,  clear  judgment,  the  fac- 
ulty of  organizing  and  commanding,  or  any  other  special 
faculty,  is  thereby  closed  to  the  great  majority  of  men. 
Even  those  employments  which  simply  require  muscular 
strength  are  thereby  closed  to  more  than  one-half  of  the 
whole  community. 

Commonly  enough,  obstacles  of  this  third  kind  are 
in  addition  to  the  need  of  long  training  and  education. 
In  the  higher  employments,  or  "  professions,"  this  is 
uniformly  the  case. 

6.  Permanent  Inequalities  in  Wages.  —  It  would  be 
impossible,  in  this  little  book,  to  go  into  all  the  details 
of  differences  in  wages  arising  from  these  impediments  to 
freedom  of  competition.  The  general  principle  govern- 
ing them  is  clear.  At  the  bottom  of  the  scale  we  find 
the  great  body  of  common  or  "  unskilled  "  laborers :  farm- 
hands, lumbermen,  teamsters,  miners,  firemen,  navvies, 
hodmen,  sailors,  fishermen,  etc.  Between  these  employ- 
ments, in  any  given  region,  there  is  fairly  complete  free- 
dom of  competition,  so  that  the  permanent  differences 


222  Political  Economy. 


of  wages  from  one  to  the  other  depend  on  the  greater 
or  less  attractiveness  of  each  employment.  Comparing 
different  countries,  however,  there  are  considerable  con- 
trasts owing  to  absence  of  free  competition. 

At  the  other  end  of  the  scale,  we  find  those  whose 
occupations  require  special  gifts  and  costly  training: 
superintendents,  hired  managers,  architects,  bank  cash- 
iers, lawyers,  doctors,  etc.  Wages  in  these  occupations 
vary  greatly  from  personal  causes ;  but  they  are  ordi- 
narily many  times  higher  than  those  of  the  unskilled 
mass. 

Between  these  extremes  there  are  many  gradations  of 
wages,  depending  in  each  case  on  the  greater  or  less 
potency  of  the  obstacles  to  freedom  of  competition. 
Thus,  next  above  the  common  laborers  come  the  arti- 
sans or  mechanics,  —  the  men  who  have  to  learn  a  trade. 
Next  above  mechanics,  those  who,  in  addition  to  ac- 
quiring a  particular  kind  of  skill,  must  also  have  a 
good  degree  of  education  and  general  intelligence:  en- 
gravers, modellers,  engineers,  chemists,  teachers,  proof- 
readers, etc. 

No  -rigid  classification  of  occupations  by  earnings  is 
possible.  Wages  in  each  trade  vary  widely  on  personal 
grounds.  Energy,  integrity,  diligence,  and  special  apti- 
tude for  the  work  are  pretty  sure  to  raise  the  possessor 
above  the  general  level  of  his  calling.  The  opposite 
qualities  are  pretty  sure  to  have  the  reverse  effect.  A 
good  teamster  may  earn  more  than  a  poor  tailor,  —  a 
skilled  engraver  more  than  an  indifferent  lawyer,  and 


Inequalities  of  Wages.  223 

so  on.  In  general,  the  higher  the  occupation  the  wider 
this  range  of  difference  in  earnings.1 

Of  course  a  certain  proportion  of  each  kind  of  labor 
is  needed  in  a  country:  the  precise  amount  depending 
on  the  nature  of  its  industries.  The  source  of  the  chief 
permanent  inequalities  of  wages  for  different  kinds  of 
labor  is  the  fact  that  the  laborers  sag  heavily  toward 
those  employments  that  make  least  call  for  intelligence, 
education,  and  skill.  In  proportion  to  the  demand  there 
is  always  a  vastly  greater  supply  offering  of  unskilled 
labor  than  of  skilled. 

7.  Wages  of  Women.  —  The  low  wages  of  women 
afford  a  good  illustration,  though  a  lamentable  one,  of 
the  principle  controlling  differences  of  wages.  The  num- 
ber of  women  who  need  to  work  for  wages  is  fortunately 
much  smaller  than  the  number  of  men.  But  their  lack 
of  physical  strength  bars  them  out  from  all  but  a  few 
productive  employments.  The  conventional  standards  of 
feminine  modesty  limit  still  further  the  range  of  occu- 
pations open  to  them.  The  result  is  that,  in  the  com- 
paratively small  number  of  employments  to  which  they 
have  access,  there  is  a  constant  oversupply  of  their  labor 
in  comparison  with  the  demand.  Consequently,  women's 
wages  are  much  lower  than  men's ;  and  there  is  no 
remedy  for  the  inequality  except  in  either  lessening  the 

1  It  is  one  of  the  least  hopeful  features  of  the  kbor  organizations 
that  they  seem  to  aim  at  a  dead  level  of  wages  for  all  who  happen  to 
be  doing  the  same  kind  of  work.  Nothing  could  be  more  fatal  to  the 
industrial  success  of  a  community  than  the  adoption  of  that  principle. 


224  Political  Economy. 

number  of  women  who  work  for  wages,  or  in  extending 
the  range  of  employments  open  to  them.  Fortunately, 
a  movement  in  the  latter  direction  seems  to  be  going  on 
in  all  civilized  countries. 

It  is  easy,  in  cases  of  this  kind,  to  mistake  the  true 
nature  of  the  difficulty,  and  to  blame  the  "  hard-heart- 
edness  of  employers "  for  evils  which  employers  are 
powerless  to  prevent.  Business  men  could  hardly  be 
expected  to  employ  any  class  of  laborers  at  a  loss.  The 
wages  they  can  afford  to  pay  to  women,  in  productive 
occupations,  are  limited  by  the  low  exchange  value  of 
the  product.  The  low  value  of  the  products  of  female 
labor  is  due  to  the  excessive  supply  of  them,  in  com- 
parison with  other  commodities ;  and  this,  in  its  turn,  is 
due  to  the  fact  that  women  crowd  into  a  few  occupa- 
tions. 

If  the  community  could  be  induced  to  pay  higher 
prices  for  the  commodities  produced  by  female  labor, 
and  to  buy,  at  the  advance,  the  whole  supply  offered, 
wages  of  women  would  soon  rise.  Till  the  employers 
can  get  higher  prices  it  is  foolish  to  reproach  them  for 
the  low  wages. 

8.  Normal  Wages  of  Individual  Laborers,  —  It  follows 
from  the  principles  stated  in  this  and  the  preceding 
chapter,  that  there  is,  in  any  given  industrial  situation, 
a  normal  rate  of  wages  for  each  kind  of  labor.  This 
rate  holds  to  the  market  rate  much  the  same  sort  of 
relation  that  natural  value  holds  to  market  value.  It 
is  the  rate  that,  with  a  normal  volume  of  savings,  would 


Normal   Wages  for  each  Kind  of  Labor.        225 

cause  the  supply  of  each  kind  of  labor  to  be  equal  to 
the  demand.  Differences  of  wages  are  not  normal  when 
they  tend  to  a  shifting  of  laborers  from  one  industry  to 
another. 

When  anything  occurs  to  raise  the  market  wages  of 
laborers  in  general,  above  the  normal  rate,  saving  is 
checked  and  wages  fall.  When  wages  are,  for  any 
reason,  below  the  normal  level,  saving  is  stimulated 
by  the  high  rate  of  profits,  and  wages  rise. 

When  wages  in  any  occupation  are  above  the  normal 
relation  to  other  wages,  an  increased  proportion  of  labor- 
ers are  attracted  into  it,  in  preference  to  other  occupa- 
tions of  similar  grade,  and  wages  in  the  employment 
are  brought  down.  In  the  reverse  case,  laborers  seek 
other  occupations  by  preference,  and  wages  in  the  given 
employment  rise. 

In  order  to  save  space,  I  shall  assume  that  the  reader 
can  see  for  himself  the  truth  of  the  following  proposi- 
tions regarding  the  normal  level  of  individual  wages : 

First,  that  it  is  high  in  communities  where  the  spirit 
of  saving  is  strong,  and  where  the  product  of  industry 
is  large  in  proportion  to  the  number  of  laborers.  If 
the  spirit  of  saving  be  weak,  or  if  the  product  be  rela- 
tively small,  the  normal  level  of  wages  will  be  low. 
Two  communities  equal  in  producing  capacity  may  have 
unequal  wages.  Again  normal  wages  may  be  equal  in 
two  communities,  notwithstanding  a  considerable  differ- 
ence in  the  productiveness  of  labor. 

Secondly,  the  normal  rate  of  wages  for  any  particular 


226  Political  Economy. 

kind  of  labor,  is  above  the  common  level  if  the  general 
mass  of  laborers  be  hindered  in  any  way  from  perform- 
ing that  kind  of  labor.  The  greater  the  obstacles,  the 
greater  the  inequality  in  wages.  Conversely,  if  the  rate 
of  wages  in  any  employment  be  permanently  above  the 
common  level,  it  is  so  only  because  the  general  mass  of 
laborers  are  hindered  from  entering  the  employment. 

Thirdly,  so  far  as  freedom  of  competition  prevails 
between  employments,  differences  in  normal  wages  de- 
pend on  differences  in  the  character  of  the  employments, 
as  viewed  by  the  laborers. 

Fourthly,  the  narrower  the  range  of  employments  open 
to  any  class  of  laborers,  the  lower  their  normal  wages 
will  be.  Conversely,  a  normal  rate  of  wages  below  the 
common  level  can  exist  only  for  laborers  whose  range 
of  competition  is  restricted. 

Fifthly,  a  rapid  increase  of  laborers  in  any  country 
tends  to  depress  the  general  level  of  wages.  It  keeps 
the  number  of  laborers  always  larger  in  proportion  to 
the  total  volume  of  savings  than  it  would  be  if  the 
increase  were  less  rapid.1 

9.  Wages  of  Non-productive  Laborers.  —  It  is  necessary, 
before  leaving  the  subject  of  wages,  to  consider  briefly 
the  wages  of  non-productive  laborers.  The  services  of 
these  laborers  are  sought,  not  with  a  view  to  profit,  but 
for  the  sake  of  the  comfort,  improvement,  or  other  bene- 
fits they  confer  on  us.  Their  wages  are  therefore  drawn, 

1  There  is  another  highly  important  consequence  of  increasing 
numbers,  which  will  appear  in  connection  with  economic  rent. 


Wages  of  Nonproductive  Laborers.  227 

not  from  the  savings,  but  from  the  speudings  of  the  com- 
munity. This  is  a  highly  important  fact  in  relation  to 
the  general  level  of  wages.  It  means  that  the  fund  for 
paying  wages  is  larger  than  we  have  hitherto  assumed 
Not,  however,  larger  by  the  full  amount  paid  for  non- 
productive services ;  for  it  is  to  be  observed  that  these 
services  are  in  part  paid  for  by  the  productive  laborers. 
Teachers,  ministers  of  religion,  physicians,  and  public 
servants  in  general  are  in  part  supported  by  the  con- 
tributions of  those  who  live  by  wages.  But  the  wealthy 
classes  use  non-productive  services  much  more  freely 
than  the  wage-earners.  They  spend  much  in  the  hire  of 
household  servants,  footmen,  coachmen,  companions,  etc. 
Whatever  amount  the  laboring  class  receive  in  these 
ways  is  a  clear  addition  to  the  wages  paid  from  savings. 
Or,  looking  at  the  case  from  another  point  of  view,  we 
can  easily  see  that  the  demand  for  these  non-productive 
services  keeps  a  considerable  number  of  laborers  out  of 
the  competition  for  savings,  and  thereby  enables  the  pro- 
ductive laborers  to  get  higher  wages  than  they  could  get 
if  the  whole  body  of  laborers  were  thrown  for  employ- 
ment on  the  savings  offered  for  profitable  investment. 

Yet  it  is  clear  that,  in  a  very  important  sense,  payments 
for  non-productive  services  are  not  so  beneficial  to  the 
laborers  as  the  offer  of  savings  would  be.  It  is  only 
better  for  them  that  the  wealthy  classes,  if  they  are 
to  spend  instead  of  saving,  should  spend  in  hiring  ser- 
vices rather  than  in  buying  luxurious  commodities. 
What  is  spent  in  commodities  is  entirely  lost  to  the 


228  Political  Economy. 

laborers.  What  is  spent  in  hiring  services  the  laborers 
get,  so  to  say,  a  single  use  of,  and  then  it  is  gone.  The 
kind  of  labor  they  give  in  return  leaves  no  product  to  be 
used  in  paying  them  for  further  labors.  If  the  amount 
were  saved  and  used  in  hiring  them  to  produce  useful 
commodities,  the  product  of  industry  would  presently 
be  increased,  and  the  wages  of  laborers  would  be  raised. 
This  on  the  hypothesis  that  those  who  have  dispensed 
with  personal  services,  persevere  in  the  saving  they 
have  begun.  Of  course  if  they  should  turn  out  to  be 
merely  changing  the  form  of  their  spending:  if  they  or 
other  wealthy  persons  should  increase  their  consump- 
tion of  good  things  to  the  extent  of  taking  up  all  that 
the  new  producers  add  to  the  product  of  industry,  wages 
would  not  be  raised  as  a  result  of  the  change. 

Or,  putting  the  same  case  in  a  different  way,  body 
servants,  footmen,  etc.,  live  on  the  products  of  other 
men's  labor.  If,  for  the  wages  they  are  receiving,  they 
were  set  at  work  as  productive  laborers,  they  would 
presently  add  to  the  product  of  industry  enough  com- 
modities for  their  own  support,  with  a  surplus  over  as 
profit  for  their  employers.  What  they  now  consume, 
as  non-productive  members  of  the  community,  would  in 
that  case,  go  to  swell  the  wages  of  other  laborers, — 
provided,  of  course,  that  the  change  denotes  a  real 
increase  of  the  saving  spirit  in  the  community. 

If  all  non-productive  laborers  were  simply  discharged, 
their  present  employers  spending  in  increased  purchases 
of  commodities  what  they  now  pay  for  non-productive 


Wages  of  Non-productive  Laborers.  229 

services,  there  would  be  a  serious  fall  of  wages.  The 
number  of  laborers  thrown  on  savings  .for  their  wages 
would  be  increased  without  a  corresponding  increase  of 
savings.  The  case  would  be  similar  in  its  effects  to  the 
increase  of  laborers  spoken  of  in  the  first  section  of  this 
chapter. 

10.  Checks  on  Competition  in  Non-productive  Occupa- 
tions.—  Wages  of  non-productive  labor  tend  to  conform 
in  a  general  way  to  those  of  productive  labor,  quantity 
for  quantity,  so  far  as  competition  prevails  between  the 
two.1  Between  the  lower  forms  of  the  one  and  the  lower 
forms  of  the  other,  there  is,  so  far  as  the  laborers  are  con- 
cerned, a  basis  for  freedom  of  competition ;  also  between 
the  higher  grades  of  the  two.  The  most  important  limi- 
tation on  freedom  of  competition  exists  on  the  side  of  the 
employers.  In  hiring  non-productive  laborers,  the  em- 
ployer is  not  aiming  at  profit,  and  does  not  therefore  feel 
so  strongly  the  need  of  proceeding  on  strictly  "business" 
principles.  He  is  spending,  and  in  spending  it  is  not 
dignified  to  higgle  over  trifles. 

Further,  the  employer  of  non-productive  laborers  has 
them  much  of  the  time  about  him.  His  personal  com- 

1  Remember,  once  more,  that  in  measuring  quantities  of  labor  we 
must  take  the  judgment  of  the  laborers ;  and  that  their  judgment  has 
reference  to  the  whole  sacrifice.  For  example,  non-productive  services 
are,  for  the  most  part,  lighter  in  the  mere  physical  exertion  they  call 
for  than  productive  labor  is.  But  the  household  servant  has  less 
personal  freedom  than  the  productive  laborer;  and  this  difference 
causes  household  service  to  be  regarded  by  the  laborers  as  less  digni- 
fied than  productive  labor.  It  is  an  element  in  their  judgment  as  to 
the  quantity  of  labor  involved  in  either  occupation. 


230  Political  Economy. 


fort  and  convenience  require  that  their  service  shall  be 
cheerful  and  willing.  This  it  could  hardly  be  if  they 
felt  that  their  services  were  poorly  paid. 

For  these  reasons,  wages  of  household  servants  are 
higher  than  they  would  be  if  fully  controlled  by  compe-' 
tition.  It  is  not  open  to  the  general  mass  of  other  labor- 
ers to  come  in  and  do  the  same  service  for  lower  wages. 
The  masters  and  mistresses  do  not  give  them  the  chance. 
The  difference  in  wages,  however,  is  not  very  great. 

Again,  no  man  drives  a  hard  bargain  with  his  doctor 
when  he  needs  medical  aid ;  or  with  his  lawyer  when  he 
gets  into  a  lawsuit.  The  services  which  professional  men 
render  are  so  important  that  we  feel  the  necessity  of 
getting  the  very  best  help  they  can  give  us.  The  pay 
of  this  class  of  laborers  is  therefore  not  wholly  under 
the  control  of  competition. 


CHAPTER  XX. 

FURTHER  CONSIDERATIONS  REGARDING  WAGES. 

1.  Combinations  to  Fix  Wages.  —  No  discussion  of 
wages  can  be  regarded  as  complete  which  fails  to  notice 
the  strong  tendency  towards  organization  that  exists 
among  the  hired  laborers  of  our  time.  The  tendency 
is  not  new,  but  in  recent  times  the  efforts  at  organiza- 
tion have  become  more  extended  than  formerly. 

The  labor  unions  have  more  than  one  object.  Largely 
they  are  associations  for  benevolent  purposes,  for  assist- 
ing members  who  are  out  of  employment,  for  relieving 
families  that  are  left  destitute,  etc.  Much  good  has 
been  accomplished  by  them  in  these  ways. 

Commonly,  however,  the  associations  have  shown  a 
tendency  to  intervene  in  questions  of  wages.  The  mem- 
bers seem  to  believe  that,  by  acting  as  a  body,  the  labor- 
ers may  force  the  employers  to  pay  higher  wages  than 
they  would  pay  if  left  to  themselves. 

The  question  is  one  of  great  practical  interest  both  to 
laborers  and  employers.  It  is  at  the  same  time,  I  think, 
a  much  broader  and  deeper  question  than  the  leaders  of 
the  labor  unions  suppose.  A  full  discussion  of  it  would 
require  much  space,  since  it  touches,  in  one  way  or  an- 

231 


232  Political  Economy. 

other,  almost  every  principle  of  political  economy.  Only 
the  chief  points  can  be  touched  on  here. 

The  most  general  form  of  the  question  is  whether,  by 
a  general  combination,  able  at  will  to  order  a  universal 
strike,  the  hired  laborers  of  the  country  could  succeed 
in  raising  the  general  level  of  wages.  Political  econo- 
mists hold  that  they  could  not ;  the  labor  agitators  seem 
to  hold  that  they  could. 

2.  Strikes  Tend  to  Discourage  Saving.  —  The  general 
grounds  of  the  answer  given  by  the  economists  can  be 
stated  very  briefly.  It  is  easily  demonstrable  that  the 
wages  of  productive  laborers  are  drawn  from  savings, 
and  that  the  total  volume  of  wages  can  be  increased 
only  by  increase  of  savings.  Now,  saving  is  a  voluntary 
act;  it  is  for  the  most  part  an  act  of  present  self-denial, 
or  sacrifice,  submitted  to  for  the  sake  of  the  future  gain 
it  will  bring.  Other  things  being  equal,  the  greater  the 
prospect  of  gain,  the  greater  the  volume  of  savings  will 
be.  We  may  safely  assume,  in  any  given  case,  that  the 
total  volume  of  savings  is  already  as  great  as  the  com- 
munity is  willing  to  make  it  for  the  existing  induce- 
ment. Normal  wages  are  therefore  as  high  already  as 
the  situation  will  bear. 

A  general  strike  might  succeed  in  getting  temporary 
increase  of  pay  for  some  laborers.  The  trouble  would 
be  to  find  employment  for  all  at  the  advance.  Wages 
could  be  raised  at  any  time,  even  without  a  strike,  by 
inducing  a  portion  of  the  laborers  to  withdraw  from 
work ;  but  the  rise  could  be  maintained  only  by  their 


Effects  of  Strikes.  233 

staying  out.  The  whole  body  of  laborers  would  not  be 
benefited  by  such  a  rise  of  wages. 

A  higher  level  of  wages  could  be  maintained  only 
by  an  increased  flow  of  savings.  But  if  wages  should 
be  raised,  profits  would  be  lowered ;  the  inducement  to 
save  would  be  less,  not  greater,  than  before;  savings 
would  therefore  fall  off  instead  of  increasing. 

The  conclusion  seems  unavoidable  that  even  a  uni- 
versal strike  for  higher  wages  must  fail  of  success.  It 
would  fail  just  as  an  attempt  to  raise  all  prices  of  goods, 
without  an  increased  supply  of  money,  would  fail.  There 
would  not  be  a  sufficient  supply  of  savings  forthcoming 
to  make  the  increased  wages  possible.  The  doctrine  of 
the  labor  unions  requires  us  to  believe  that  men  would 
save  more  for  a  less  inducement  than  for  a  greater.  It  is 
therefore  contrary  to  the  fundamental  principle  of  wages. 

The  only  way  by  which  the  laborers  can  make  sure 
of  raising  their  wages  is  clearly  by  adding  all  they  can  to 
the  productiveness  of  their  labor.  By  greater  diligence, 
better  care  of  machinery  and  materials,  more  disposition 
to  turn  everything  to  the  best  account  for  their  employ- 
ers, they  would  increase  very  much  the  value  of  their 
services;  the  product  of  industry  would  become  greater; 
both  the  means  of  saving  and  the  inducement  to  save 
would  be  increased.  That  the  speedy  result  would  be 
an  increased  demand  for  labor  and  a  general  rise  of  wages, 
does  not  admit  of  a  doubt. 

Strikes,  with  their  attendant  interruption  of  industry, 
with  the  disorders,  violence,  and  destruction  of  property 


234  Political  Economy. 


that  so  commonly  grow  out  of  them,  are  poor  incentives 
to  induce  people  to  save  their  income  with  a  view  to 
investing  in  business  enterprises.  Till  the  laborers  are 
willing  to  save  the  means  of  providing  capital  of  their 
own,  it  is  clearly  their  interest  to  do  nothing  that  tends 
to  check  the  saving  spirit  in  others. 

3.  Futility  of  Strikes  in  Practice.  —  The  common 
result  of  strikes  against  individual  employers  shows 
plainly  enough  the  weak  point  in  the  theory  that  strikes 
may  raise  the  general  level  of  wages.  Commonly  the 
strikers  fail,  because  it  usually  turns  out  that  there  are 
many  other  laborers  who,  having  either  no  employment 
or  poorer  pay  than  the  strikers,  are  glad  to  accept  the 
terms  these  have  rejected.  The  few  cases  in  which  this 
is  not  true,  in  which  therefore  strikes  succeed,  are  cases 
in  which  a  rise  of  wages  is  on  the  eve  of  coming  about, 
without  a  strike,  by  the  action  of  supply  and  demand. 

A  strike  for  advance  of  pay  in  any  industry,  if  made 
when  business  is  improving  or  has  improved,  may  hasten 
the  rise  of  wages.  Strikes  against  reduction  of  wages 
nearly  always  fail.  They  come  at  a  time  when  employ- 
ers may  have  little  or  nothing  to  gain  by  going  on  with 
production,  even  at  the  reduced  wages.  A  stoppage  of 
work  for  a  while  may  be  a  welcome  relief  to  the  em- 
ployers at  such  a  time.  A  strike,  in  these  circum- 
stances, is  sure  to  fail.  In  no  case  is  it  sure  to  succeed. 
There  can  be  no  doubt,  looking  at  the  history  of  strikes 
in  general,  that  they  have  been  on  the  whole  a  source 
of  great  loss  to  the  laborers. 


E/ects  of  Strikes.  235 

One  further  reflection  as  to  strikes  is,  that  they  are 
never  directed  against  the  most  obvious  source  of  low 
wages.  The  real  wages  of  laborers  depend  as  much  on 
the  prices  of  the  things  they  buy,  as  on  the  amount  of 
money  they  receive  from  their  employers.  The  great 
loss  of  real  wages  comes  in  the  difference  between  the 
prices  the  producing  employers  get  from  the  traders  and 
the  prices  we  all  have  to  pay  at  retail.  Even  if  the 
direct  employers  of  the  great  mass  of  laborers  should 
raise  wages  to  the  point  of  foregoing  all  their  profit, 
the  difference  in  wages  would  be  slight.  On  the  other 
hand,  if  the  cost  and  risks  of  making  the  exchange  of 
products  could  be  reduced  one-half,  the  gain  in  real 
wages  would  be  great.  The  establishment  of  co-oper- 
ative stores  by  the  laborers  in  England  was,  therefore, 
a  move  in  the  right  direction.  It  has  proved  a  great 
success.  If  our  American  laborers  would  but  devote  to 
a  similar  plan  a  part  of  the  energy  and  money  they 
have  wasted  and  still  waste  in  strikes,  there  can  be  no 
doubt  of  their  opportunity  to  raise  very  materially  their 
real  wages  thereby. 

4.  High  Profits  Favorable  to  High  Wages.  —  It  may 
seem  to  some  that  this  puts  political  economy  on  the 
side  of  the  capitalists  in  the  struggle  about  wages. 
That  is  not  the  case.  Economists  have  always  sym- 
pathized deeply  with  every  feasible  plan  for  improving 
the  lot  of  those  who  work  for  wages.  They  have 
always  denounced  all  harsh  and  unfair  treatment  of 
laborers.  But  they  cannot  allow  their  sympathy  to 


236  Political  Economy. 

blind  them  to  the  facts  of  the  case.  They  see  what 
the  labor  agitators  too  often  fail  to  see,  namely,  that 
people  cannot  be  coerced  into  saving.  Further,  the 
economist  does  not  look  with  jealousy  on  the  profits 
of  employers,  for  he  knows  that  the  higher  profits  are, 
the  better  hope  there  is  for  the  laborers.  He  knows  that 
high  profits  to-day  are  the  best  ground  for  expecting  high 


wages  to-morrow. 


What  the  laborers  fail  to  get  of  the  product  of  in- 
dustry, is  not  what  the  employers  gain,  but  what  they 
consume.  So  far  as  profits  are  saved,  they  become  wages. 
The  profits  of  to-day  are  not  high  at  the  expense  of  the 
wages  of  to-day,  they  are  high  at  the  expense  of  past 
wages,  which  are  now  beyond  the  reach  of  change  by 
strike  or  other  means.  Instead,  therefore,  of  fretting 
over  the  high  profit  of  capital,  laborers  ought  to  rejoice 
in  it.  The  thing  they  have  some  reason  to  grudge  is 
the  lavish  expenditure  of  the  capitalist  class.  Their 
loss  is  not  what  the  capitalists  gain,  but  what  they 
spend.  This  is  so  important  a  principle  and  so  contrary 
to  popular  theories  that  we  shall  do  well  to  consider  it 
fully. 

5.  Do  we  Help  the  Laborers  by  Buying  Goods?  — 
There  is  a  wide-spread  belief  that  whoever  buys  goods 
of  the  merchants  helps  the  laborers.  Those  who,  hav- 
ing the  ability  to  spend  freely,  choose  to  live  economi- 
cally are  commonly  regarded  as  churlish  and  unfriendly 
to  those  who  live  by  wages.  On  the  other  hand,  those 
who  are  lavish  in  buying  luxuries  for  themselves  are 


Demand  for  Goods  not  a  Demand  for  Labor.    237 

often  spoken  of  as  benefactors  of  the  laborers.  Their 
purchases  are  supposed  to  create  a  demand  for  labor 
and  to  promote  high  wages. 

This  is  one  of  the  many  popular  ideas  which  political 
economy  has  to  reject  and  refute.  It  is  not  true,  thougli 
it  looks  true.  Anybody  who  thinks  carefully  about  the 
matter  for  a  little  while  ought  to  be  able  to  expose 
the  fallacy.  Observe  that  the  question  is,  at  bottom, 
whether  it  is  better  for  the  laborers  that  you  should 
spend  your  money  in  getting  enjoyable  things  for  your- 
self, or  should  turn  it  over  to  them  to  spend.  If  you 
save  and  invest  it  in  any  form,  it  is  sure  in  the  end 
to  reach  the  laborers  as  wages.  Even  if  you  merely 
put  it  in  a  savings'  bank,  the  bank  lends  it  to  some 
business  man  in  whose  hands  it  soon  becomes  wages. 
The  result  will  be  that  your  saving  adds  just  so  much 
to  the  amount  the  laborers  receive  for  their  work. 

Perhaps  the  easiest  way  of  perceiving  the  error  of 
the  popular  theory  is  to  consider  it  in  connection  with 
the  circulation  of  money.  Looking  again  at  the  diagram 
on  page  134,  it  ought  to  be  easy  to  see  that  the  greater 
the  amount  returning  to  1  through  a,  d,  g,  j,  and  q,  the 
less  there  is  left  to  pass  through  the  channels  for  wages, 
6,  e,  h,  I,  and  o.  In  other  words,  the  more  the  wealthy 
classes  spend  in  buying  commodities  for  their  own  con- 
sumption, the  lower  the  wages  of  the  laborers  will  be. 

The  laborers  get,  not  what  is  spent,  but  what  is  saved. 
Those  who  hold  that  the  mere  purchase  of  products 
of  labor  helps  the  laborers,  forget  to  ask  what  would 


238  Political  Economy. 

happen  if  everybody  acted  on  that  principle.  If,  for 
example,  the  merchants  and  the  manufacturers,  instead 
of  hiring  laborers  with  the  money  we  pay  them  for  their 
goods,  should  at  once  spend  it  in  buying  things  for 
their  own  enjoyment,  where  would  the  advantage  to  the 
laborers  come  in  ?  It  is  only  by  taking  for  granted  that 
the  business  men  will  do  what  we  have  not  done,— 
will  save  what  they  receive  and  hire  laborers  with 
it,  —  that  anybody  could  hold  the  doctrine  for  a  mo- 
ment. But  if  saving  on  the  part  of  business  men  be 
good  and  even  necessary  for  the  laborers,  why  should 
it  be  less  beneficial  when  practised  by  others  ? 

6.  The  Argument  from  the  Need  of  a  Market.  —  To 
the  question  just  asked,  the  advocate  of  the  time-worn 
fallacy  usually  replies  by  urging  the  necessity  of  a 
market.  Briefly  stated,  his  argument  is  that  "If  nobody 
bought  things,  there  wonld  be  no  call  for  labor  to  make 
things."  This  may  be  freely  admitted,  but  it  has  no 
bearing  on  the  case. 

The  question  is  not  whether  there  are  to  be  any 
buyers  or  no,  but  Who  are  to  be  the  buyers  ?  When 
hired  laborers  spend  their  wages,  they  are  buyers  quite 
as  truly  as  any  other  class.  In  saving  money,  we  simply 
transfer  buying  power  to  those  who  live  by  wages.  The 
question,  therefore,  is  simply  Who  shall  have  the  priv- 
ilege of  buying  ?  Whoever  has  that,  constitutes  the 
market.  The  higher  wages  are,  the  greater  is  the  market 
offered  by  the  laborers.  Even  if  all  income  could  be 
saved  and  paid  for  labor,  it  would  only  amount  to  mak- 


Saviny  does  not  Lessen  Demand  for   Goods.      239 


ing  the  laborers  a  market  for  the  whole  product  of 
industry. 

As  to  the  call  for  labor,  there  would  be  the  same  need 
of  labor  to  make  things  for  working  men  and  their 
families  that  there  is  to  make  things  for  the  wealthier 
classes.  The  precise  things  to  be  made  would  no  doubt 
be  different;  but  that  would  be  merely  a  question  of 
the  sort  of  production  to  be  carried  on,  not  a  question 
whether  any  sort  of  production  would  be  needed. 

7.  Increase  of  Saving  does  not  Lessen  the  Total  Demand 
for  Commodities.  —  The  fact  that  the  commodities  laborers 
buy  with  their  money  are  not  the  same  that  the  person 
who  saves  the  money  would  have  bought,  makes  it  easy 
to  fall  into  a  wrong  view  of  the  effect  of  saving.  When 
persons  who  have  been  accustomed  to  spend  freely 
abandon  their  extravagant  habits,  we  are  apt  to  think 
of  the  shopkeepers  with  their  stocks  of  cigars,  wines, 
silks,  and  laces.  We  see  that  until  they  sell  these,  they 
will  not  order  a  fresh  supply ;  and  so  the  manufacturers 
may  not  venture  to  produce  further  stocks.  When  the 
buyers  appear,  they  seem  to  set  the  whole  productive 
machinery  in  operation,  and  thus  to  create  the  occasion 
for  the  hiring  of  laborers. 

But  to  look  at  the  matter  in  this  way  is  to  omit  the 
most  important  feature  of  the  case.  Wines  and  laces 
are  produced  only  because  there  is  a  demand  for  them. 
Had  people  always  saved  their  money  instead  of  spend- 
ing it  in  buying  luxurious  articles,  such  articles  would 
not  have  been  on  the  hands  of  the 


240  Political  Economy. 


buyers.  If  people  should  suddenly  give  up  buying  wines 
and  silks,  of  course  the  manufacturers  and  merchants 
might  lose  a  large  part  of  the  savings  they  have  in- 
vested in  the  production  and  sale  of  these  commodities. 
But  let  us  suppose  the  change  to  be  foreseen,  or  even  to 
be  gradual,  so  that  the  producers  and  dealers  may  have 
time  to  withdraw  from  the  business  in  time.  In  that 
case  they  would  still  have  their  savings,  and  would 
still  wish  to  use  them  so  as  to  make  profit.  They 
would,  therefore,  continue  to  employ  as  many  laborers 
as  before,  —  merely  changing  the  precise  mode  of  em- 
ploying them.  On  their  part,  then,  the  payment  of 
wages  would  not  be  lessened.1 

Attending  now  to  those  who  save  the  amount  previ- 
ously expended  in  the  purchase  of  luxuries,  there  ought 
to  be  no  difficulty  in  seeing  that  all  they  save  and  invest 
is  a  clear  addition  to  the  wages  of  labor.  If  anybody 
doubts  the  existence  of  a  market  under  these  conditions, 
for  all  that  the  laborers  could  produce,  let  him  consider 
the  case  from  the  side  of  the  laborers.  Why  do  they 
labor  ?  Is  not  the  mere  fact  of  their  working  for  wages 
a  proof  that  they  desire  products  of  industry  ?  The  only 

1  Some  loss  of  fixed  capital  would  be  likely  to  attend  the  change  ; 
but  the  opposite  change  (that  is,  a  decrease  of  saving  and  a  fall  of 
wages)  would  involve  a  similar  loss.  Such  losses  attend  every  change 
of  fashion,  and  even  every  improvement  in  production.  This  is  one  of 
the  risks  that  producers  have  to  run.  The  danger  tends,  no  doubt, 
to  discourage  saving,  and  so  tends  to  depress  wages.  The  ordinary 
expectation  of  profit  must,  in  other  words,  be  high  enough,  after 
allowing  for  these  losses,  to  induce  men  to  save  and  invest. 


How  Money  Complicates  the  Case.  241 

possible  doubt  in  the  case  would  be,  What  particular 
products  do  they  desire  as  their  increase  of  wages  ? 
Whatever  these  products,  the  increase  of  demand  would 
call  forth  an  increased  production  of  them.  Even  if  they 
wished  only  money  to  lay  by  for  future  use,  money  is 
a  product  of  labor.  Such  a  demand  would  simply  raise 
the  value  of  money,  and  divert  an  increased  amount  of 
labor  into  the  production  of  gold  and  silver. 

The  whole  result,  then,  of  increased  saving  is  to  raise 
wages,  to  diminish  the  demand  for  certain  articles  and 
to  increase,  to  the  same  precise  extent,  the  demand  for 
certain  other  articles. 

8.  Obscuring  Effect  of  the  Use  of  Money.  —  We  have 
seen  already  how  much  the  use  of  money  obscures  the 
true  nature  of  buying  and  selling.  We  now  see  that  it 
has  the  same  effect  on  the  payment  of  wages.  If  em- 
ployers were  accustomed  to  pay  their  laborers  in  actual 
commodities,  I  think  that  the  error  we  are  considering 
would  never  have  arisen.  Nobody  could  then  fail  to  see 
the  absurdity  of  supposing  that  the  rich  help  the  poor 
by  lavish  consumption  of  commodities,  and  injure  them 
by  saving  as  much  as  possible  for  investment.  Every- 
body would  perceive  that  the  wages  of  those  who  work 
for  hire  consist  precisely,  not  of  what  other  men  consume, 
but  of  what  other  men  do  not  consume. 

The  use  of  money  brings  the  payment  of  wages  into 
close  connection  with  the  exchange  of  commodities.  It 
separates  the  receipt  of  wages  into  two  acts  :  first,  the 
receipt  of  the  money  from  the  employer,  and  secondly, 


242  Political  Economy. 

the  purchase  of  commodities  with  the  money.  The 
second  of  these  acts  has  nothing  in  it,  at  least  on  the 
surface,  to  distinguish  it  from  other  purchases  of  goods. 
Yet  in  a  very  important  sense  it  is  the  true  payment  of 
wages.  The  amount  of  money  received  for  a  day's 
work  is  a  matter  of  small  consequence  in  itself;  the 
real  question  of  wages  is  how  great  a  quantity  of  needful 
commodities  a  man  can  obtain  for  his  labor. 

Further,  as  we  have  seen  in  a  previous  chapter,  this 
connection  between  payment  of  wages  and  the  sale  of 
goods,  makes  it  easy  to  mistake  the  real  nature  of  the 
trouble,  when,  for  any  reason,  there  is  a  falling  off  in 
the  investment  of  savings.  The  obvious  thing,  at  such 
a  time,  is  the  decrease  in  the  sales  of  goods.  The  accu- 
mulation of  uninvested  savings  in  the  hands  of  bankers 
and  others,  is  either  not  noticed,  or  is  regarded  as  a  mere 
consequence  of  the  failing  demand  for  goods.  In  this 
way,  unthinking  persons  are  confirmed  in  the  erroneous 
opinion  that  when  we  buy  commodities  for  our  own  use 
we  give  employment  to  laborers.  If  they  reflected  at 
all,  they  could  hardly  fail  to  see  that  the  commodities 
which  do  not  sell  are  in  fact  awaiting  use  in  the  pay- 
ment of  real  wages ;  and  that,  but  for  the  presence  of 
money,  these  commodities  would  appear  as  savings  in 
the  hands  of  the  employers,  rather  than  as  unsalable 
goods  in  the  shops. 

9.  Wages  an  Advance.  —  The  question  we  are  consid- 
ering goes  to  the  foundations  of  political  economy.  A 
whole  group  of  important  practical  questions  depend 


Wages  an  Advance.  243 

upon  the  answer  we  give  to  this  one.  It  may  therefore 
be  well  to  consider  the  matter  from  another  .point  of 
view. 

The  fundamental  reason  why  demand  for  commodities 
is  not  a  demand  for  labor,  is  found  in  the  fact  that  the 
production  and  exchange  of  finished  commodities  requires 
so  much  time.  If  every  commodity  could  be  produced  in 
a  day,  or  a  week,  and  could  be  immediately  exchanged 
for  such  things  as  the  producer  happened  to  desire,  there 
would  be  no  essential  difference  between  paying  a  man 
wages  and  buying  his  product.  There  are,  in  fact,  a 
few  cases  in  which  the  purchase  of  the  product  answers 
the  same  purpose  as  the  direct  hiring  of  the  laborer 
would  serve. 

If,  for  example,  at  the  proper  season,  one  should  offer 
to  buy  wild  flowers,  or  berries,  or  autumn  leaves,  or  shells 
from  the  beach,  or  any  other  thing  that  can  be  ob- 
tained without  much  previous  labor,  the  offer  would 
be  as  good  for  the  country  boy  as  the  offer  of  wages 
would  be.  It  would  be  a  demand  for  his  labor. 

But  very  different  is  the  offer  to  buy  a  suit  of  clothes 
from  a  journeyman  tailor  who  is  looking  for  employment; 
or  a  car-load  of  potatoes  from  a  farm  laborer  in  the  like 
case;  or  a  house  from  a  carpenter  who  is  out  of  work; 
or  a  roll  of  cotton  cloth  from  a  mill  operative ;  or  a  ton 
of  coal  from  a  coal  miner,  etc. 

A  little  careful  thinking  about  these  two  sets  of  cases 
will  make  clear  the  reason  why,  in  civilized  industry,  the 
offer  to  buy  goods  does  not  give  employment  to  needy 


244  Political  Economy. 

laborers.     Production  takes  too  long  to  make  the  offer  of 
any  service  to  them. 

In  considering  the  matter  the  student  must  take  care 
to  include  the  whole  case.  The  production  of  each  com- 
modity must  be  viewed  as  a  whole  All  the  labor  of 
preparing  the  natural  agents,  of  raising  or  procuring  the 
materials,  and  of  making  the  requisite  machinery,  must 
be  included  in  the  labor  of  producing  the  enjoyable  com- 
modity which  finally  results  from  them.  This  point  is 
of  great  importance  in  the  study  of  wages.  It  is  the 
simple  fact  that  labor  spent  in  getting  ready  to  produce 
good  things,  has  itself  no  immediate  result  that  is  good 
to  eat  or  to  drink  or  to  wear. 

Though  machinery  and  materials  are  bought  and  sold; 
and  though,  on  the  surface,  there  is  nothing  to  distin- 
guish such  sales  from  the  sale  of  enjoyable  commodities 
to  consumers,  yet  a  little  reflection  shows  us  that  there 
is  a  very  wide  difference.  In  sales  of  the  latter  kind,  the 
purchaser  is  taking  his  reward  for  labor  or  waiting.  In 
the  purchase  of  materials  or  machinery  he  is  investing 
savings. 

If  men  receive  any  immediate  return  for  labor  spent 
in  providing  the  capital  used  in  production,  it  must  come 
from  the  saved  products  of  other  labor.  No  matter  in 
what  form,  or  under  what  name  the  return  is  obtained, 
it  is  in  the  nature  of  an  advance  out  of  savings. 

For  example,  an  agreement  to  buy  of  the  laborers,  at 
the  end  of  each  day  or  each  week,  the  unfinished  results 
of  their  work  up  to  that  point,  would  not  differ  in  prin- 


Extent  to  which   Wages  are  Advanced.          245 

ciple  from  an  agreement  to  pay  them  wages.  No-  man 
could  do  either  without  a  fund  of  savings  to  be  used  for 
the  purpose.  He  could  not  use  the  very  things  pro- 
duced by  the  laborers  themselves,  until  they  had  got  by 
the  work  of  creating  capital,  and  had  begun  to  turn  out 
true  commodities.  All  the  finished  commodities  received 
by  the  workmen  for  their  labor  up  to  that  point  are 
advanced  to  them  out  of  the  saved  products  of  other 
labor. 

10.  Extent  of  the  Advance.  —  Perhaps  the  simplest  way 
of  estimating  the  extent  to  which  wages  are  advanced 
out  of  savings  is  to  look  at  the  industrial  system  as  a 
whole.  All  the  contrivances  and  arrangements  for  pro- 
ducing and  exchanging  enjoyable  commodities,  the  three 
classes  of  things  to  which  we  give  the  general  name 
of  Capital,  represent  labor  which  could  not  have  been 
rewarded  by  anything  of  its  own  producing. 

If  the  whole  existing  apparatus  of  production  and 
exchange  were  swept  away,  a  great  deal  of  labor  would 
be  required  for  restoring  it.  That  labor  would  have  to 
be  applied  without  immediate  return  of  its  own  yielding. 
Anybody  getting  a  weekly  allowance  of  enjoyable  com- 
modities, or  the  means  of  buying  such,  in  return  for  this 
labor,  would  be  getting  payment  in  advance  of  his  own 
production.  The  length  of  time  it  would  take  to  replace 
the  capital  of  the  country,  measures  pfetty  accurately  the 
extent  to  which  wages,  in  our  existing  system,  are  paid 
in  advance  of  the  natural  return  for  labor. 

The  extent  to  which  wages  are  advanced  is  mucli  dis- 


246  Political  Economy. 


guised  by  the  division  of  labor  among  employers.  Each 
employer  seems  as  a  rule  to  recover  pretty  quickly,  by 
the  sale  of  his  product,  the  amounts  paid  out  to  his 
laborers.  The  manufacturer  of  cloth,  for  example,  may 
sell  his  product  from  week  to  week,  almost  as  quickly  as 
it  is^made  ;  and  with  the  proceeds  he  pays  his  laborers. 
So  that  his  advance  of  wages  seems  to  be  slight. 

But  this  is  to  look  only  at  the  surface  of  the  matter. 
The  manufacture  of  cloth  is  but  one  stage  of  the  work 
of  producing  coats.  When  the  manufacturer  buys  his 
materials,  he  in  fact  advances  wages;  he  pays  for  all 
the  work  already  done  upon  them  ;  he  gives  free  savings 
for  capital,  just  as  if  he  had  himself  hired  the  laborers 
who  produced  the  materials. 

Further,  at  the  very  outset  of  his  enterprise  he  had 
to  make  large  outlays  of  savings  in  the  construction  of 
buildings  and  in  the  purchase  of  machinery.  These  ad- 
vances consisted  mainly  of  wages  paid  to  the  laborers 
who  produced  the  buildings  and  machinery.  It  is  quite 
immaterial  whether  he  himself  appeared  as  the  direct 
employer  of  these  laborers,  or  simply  took  over  by  pur- 
chase the  work  of  other  employers.  In  either  case,  what- 
ever the  laborers  receive  for  producing  capital  can  only 
come  from  savings.  And,  as  to  the  extent  of  the  ad- 
vance, we  readily  see  that  years  must  elapse  before  the 
savings  paid  for  clearing  land,  opening  mines,  construct- 
ing railways,  ships,  buildings,  machinery,  etc.,  can  be 
fully  recovered  through  the  commodities  which  these 
help  to  produce. 


A  Practical  Test  Suggested.  247 

11.  Fallacy  of  Denying  the  Advance  of  Wages.  —  Mr. 

Henry  George  and  some  other  writers  deny  that  wages 
are  a  real  advance,  alleging  that,  before  receiving  wages, 
the  laborers  always  add  a  full  equivalent  to  the  posses- 
sions of  their  employers.  The  question  may  easily  be 
put  to  a  practical  test  by  anybody  who  accepts  Mr. 
George's  doctrine.  It  is  only  necessary  that  he  shall 
prevail  on  a  body  of  laborers  sharing  his  view  to  join 
him  in  demonstrating,  by  actual  experiment,  that  wages 
can  be  paid  without  the  advance  of  savings. 

It  would  only  be  necessary  that  he  and  they  should 
withdraw  by  themselves,  and  begin  the  production  of 
any  commodity  or  commodities  they  please.  The  leader 
must  pay  his  men  week  by  week,  just  as  ordinary  em- 
ployers do;  but  he  is  to  avoid  the  use  of  savings  in 
doing  so.  He  is  even  to  avoid  the  indirect  use  of  other 
men's  savings.  If  he  resorts  to  exchange  of  products 
with  outsiders,  he  is  to  offer  only  finished  commodities. 
Further,  he  must  make  no  covert  use  of  savings  by  an- 
ticipating the  results  of  the  exchange  through  advances 
from  the  dealer.  He  must  wait  until  his  product  finds 
its  way  to  the  consumers  and  their  return  commodity 
finds  its  way  to  him.  On  these  terms  he  is  to  use  the 
results  of  each  week's  labor  with  entire  freedom,  as 
resources  for  the  payment  of  wages  to  his  men. 

Anybody  who  tries  this  experiment,  or  even  considers 
how  it  would  be  likely  to  work  if  tried,  will  scarcely  be 
disposed  to  doubt  the  advance  of  wages.  He  must  per- 
ceive that  the  addition  a  laborer  makes  to  his  employer's 


248  Political  Economy. 

possessions  each  week,  is  a  very  different  thing  from  the 
assortment  of  enjoyable  commodities  the  laborer  must 
have  as  wages.  The  difference  constitutes  the  whole 
occasion  for  the  existence  of  wages. 

12.  Production  by  Prison  Labor.  —  The  foregoing  prin- 
ciples have  an  obvious  bearing  on  the  vexed  question 
-of  prison  labor.  There  are  two  chief  objections  made  to 
the  employment  of  such  labor  in  production;  first,  that 
it  lessens  the  demand  for  free  labor,  and  secondly,  that  it 
imposes  an  unfair  competition  on  free  laborers. 

The  first  objection  assumes  that  there  is  a  limit  to 
the  total  demand  for  commodities;  that,  therefore,  if  any 
portion  of  the  demand  be  supplied  by  prison  labor,  the 
opportunities  for  free  laborers  to  earn  wages  are,  to  that 
extent,  abridged.  The  assumption  is  plausible ;  but  a 
little  careful  thinking  shows  that  it  is  not  true.  It  is 
simply  one  form  of  the  notion  that  general  overproduc- 
tion is  possible.  If  it  were  true,  it  would  follow  that 
every  invention  which  increases  the  productiveness  of 
labor  is  injurious  to  the  laborers.  It  would  even  follow 
that  destruction  of  commodities  by  fire,  shipwreck,  etc., 
is  a  good  thing  for  those  who  live  by  wages.  In  fact, 
one  occasionally  hears  these  corollaries  of  the  doctrine 
gravely  advanced  as  unquestionable  truths. 

However  great  the  supply  of  commodities  may  be,  it 
can  never  outrun  the  desire  to  possess  commodities.  You 
will  never  hear  of  anybody  who  has  more  than  he  wishes 
to  have,  or  who  is  ready  to  part  with  his  product  with- 
out an  equivalent  of  other  products.  There  is,  in  fact, 
no  limit  to  the  desire  for  wealth. 


The  Question  of  Prison  Labor,  249 

The  owners  of  the  existing  supply  of  goods  and  money 
can  safely  be  counted  on  to  use  a  portion  for  their  own 
enjoyment  The  rest  they  will  wish  to  use  so  as  to  gain 
more  wealth,  and  this  can  be  done  only  by  hiring  pro- 
ductive laborers.  The  question,  then,  is  whether  there 
is  a  limit  to  the  amount  of  commodities  the  laborers  are 
willing  to  receive  as  wages.  Those  who  assert  that  the 
demand  for  commodities  is  limited,  forget  that  the  labor- 
ers constitute  the  great  market  for  the  products  of  labor ; 
and  that  they  stand  ready  to  receive  all,  and  more  than 
all,  that  others  may  spare. 

If  prison  labor  adds  anything  to  the  general  supply 
of  good  things,  the  addition  can  have  no  tendency  to 
check  the  desire  of  the  capitalist  class  to  gain  increase 
of  wealth.  Neither  can  it  diminish  their  resources 
for  saving ;  on  the  contrary,  it  tends  to  increase  them. 
Consequently,  the  most  effective  use  of  prison  labor  can 
only  tend  to  raise  the  wages  of  free  laborers. 

The  second  objection  rests  on  the  fact  that  prisoners 
do  not  work  for  wages.  Those  who  employ  them  are 
therefore  said  to  have  an  unfair  advantage  over  employ- 
ers of  free  labor,  unless  the  free  laborers  are  willing  to 
accept  very  low  wages.  Herein  lies  the  unfair  compe- 
tition of  which  so  much  complaint  lias  been  made. 

This  objection  is,  at  bottom,  identical  with  the  other. 
It  assumes  that  there  is  not  field  enough  for  free  labor 
without  coming  into  hurtful  competition  with  the  mal- 
efactors. But  evidently  there  is  no  reason  why  the 
classes  of  commodities  to  which  prison  labor  is  applied 


250  Political  Economy. 

should  not  be  kept  in  due  proportion  to  other  commodi- 
ties. Unless  there  be  needless  changing  of  the  articles 
produced  by  prisoners,  this  contribution  can  be  reckoned 
on  as  a  regular  portion  of  the  supply ;  and  ordinary  in- 
dustry can  as  easily  adjust  itself  to  the  situation  as  it 
could  if  the  prisoners  were  so  many  free  laborers. 

Unless  the  mistake  be  made  of  producing  too  great  a 
relative  supply  of  those  particular  articles,  there  is  no  rea- 
son why  they  should  not  sell  at  their  natural  value ;  and 
if  they  sell  at  their  natural  value,  the  fact  that  a  portion  of 
the  supply  comes  from  the  prisons  can  have  no  ill  effect  on 
the  wages  and  profits  of  those  who  produce  the  remainder. 

There  is,  in  fact,  no  necessary  competition,  fair  or 
unfair,  between  free  laborers  working  for  hire,  and  pris- 
oners undergoing  penal  labor.  The  feature  to  which 
objection  is  made  is  precisely  the  point  at  which,  so  far 
as  free  laborers  are  concerned,  the  benefit  of  prison  labor 
comes  in.  If  the  prisoners  were  free  they  would  be  draw- 
ing full  wages  from  the  savings  offering  for  investment ; 
they  would  be  in  real  competition  with  other  laborers  of 
their  grade.  Being  in  prison,  all  they  receive  for  their 
labor  is  their  prison  fare,  and  this  they  would  receive 
even  if  they  were  kept  in  idleness.  All  that  they  pro- 
duce is  therefore  a  clear  gain  to  the  rest  of  the  commu- 
nity. The  more  they  produce,  the  more  there  will  be 
for  honest  men  to  enjoy.  Even  if  they  should  steadily 
furnish  the  whole  supply  of  some  articles,  and  should  do 
so  at  prices  far  below  the  natural  value,  the  result  would 
be  a  benefit  and  not  an  injury  to  the  rest  of  the  community. 


CHAPTER    XXL 

PROFITS    OF    INDIVIDUAL    EMPLOYERS. 

1.  Outlay  and  Return   of  the   Individual   Employer,  — 

The  aggregate  profits  of  the  whole  body  of  employers 
are  measured,  as  we  have  seen,  by  comparing  the  product 
of  industry  with  the  cost  to  them  of  getting  it  produced ; 
that  is,  by  comparing  their  outlay  with  the  return. 
Further,  the  whole  outlay,  in  this  general  case,  resolves 
itself  into  the  real  wages  paid  to  the  laborers. 

The  profits  of  the  individual  employer  must  also  be 
measured,  of  course,  by  comparing  his  outlay  with  his 
return.  But  there  is  a  very  important  difference  between 
the  two  cases.  The  outlay  of  the  individual  employer 
does  not  consist  wholly  of  wages ;  the  larger  part  of  it 
usually  consists  of  payments  made  to  other  business  men 
for  materials,  machinery,  etc.1  Again,  on  the  other  side 
of  the  account,  his  return,  in  the  sense  in  which  his 
profits  depend  on  it,  does  not  consist  of  the  product  he 
obtains  by  the  outlay.  It  consists  rather  of  the  amount 

1  For  an  illustration  of  this  see  the  table  on  page  103.  Of  course 
the  proportion  of  wages  to  other  outlay  differs  widely  in  different 
industries.  The  whole  matter  depends  on  the  extent  to  which  divi- 
sion of  labor  is  applied  to  the  work  of  employing  labor.  The  more 
minute  the  subdivision,  the  greater  the  ratio  of  other  outlay  to  wages. 

251 


252  Political  Economy. 

he  receives  for  the  product  when  he  sells  it;  and  this 
depends  quite  as  much  on  the  price  he  gets  as  it  does 
on  the  quantity  he  has  to  sell.1 

2.  Two  Sources  of  Individual  Profit.  —  Evidently,  then, 
the  profits  of  the  individual  employer  do  not  rest  on  so 
simple  a  basis  as  aggregate  profits.  There  is  but  one  way 
by  which  the  whole  body  of  employers  may  make  profits, 
namely,  by  getting  the  laborers  to  produce  a  greater  quan- 
tity of  wealth  than  they  pay  them  as  wages.  But  there 
are  two  ways  by  which  the  individual  employer  may  gain 
profits  :  first,  by  getting  laborers  to  produce  more  than  he 
pays  for  their  services ;  secondly,  by  gaining,  through 
fortunate  trading,  a  part  of  the  profits  produced  by  other 
men's  laborers. 

In  practical  business  these  two  ways  of  gaining  profit 
are  inseparably  combined.  Under  division  of  labor  no 
man  can  be  an  employer  without  being  also  a  buyer  and 
seller.  His  profits  depend  on  his  success  in  both  capaci- 
ties. Both  the  cost  to  him  of  his  product,  and  the  return 
for  his  outlay,  depend  in  large  part  on  the  results  of  his 
dealings  with  other  business  men.  Though  the  necessary 

1  This  point  did  not  arise  to  trouble  us  in  the  case  of  aggregate 
profits.  In  the  general  case  we  can  compare  real  wages  with  product 
by  physical  measurement,  because  all  the  commodities  included  in 
wages  are  reproduced  in  the  product,  —  with  a  surplus  over,  which 
constitutes  the  general  profit.  Aggregate  profits  are  not  affected  by 
changes  of  value,  since,  when  one  commodity  falls  in  value,  others 
rise.  In  fact,  value  can  hardly  be  said  to  belong  to  commodities  in  the 
mass,  or  to  the  sum  of  wealth.  It  belongs  rather  to  one  commodity  as 
compared  with  another,  when  the  question  is  of  exchanging  one  man's 
wealth  for  another  man's. 


The  Measure  of  Individual  Profit.  253 

buying  and  selling  between  employers  create  no  profits, 
they  do  determine  very  effectively  who  is  to  own  and 
enjoy  the  pro/its  that  are  created  by  the  general  industry 
of  the  community. 

3.  Money  a  Common  Measure  of  Outlay  and  Return. — 
In  computing  individual  profits  we  need  to  have  the  out- 
lay and  the  return  expressed  in  terms  of  the  same  denom- 
ination. Otherwise,  we  cannot  compare  them  and  say 
how  great  the  difference  is.  We  cannot,  for  example,  in 
the  case  of  any  one  employer,  compare  the  general  assort- 
ment of  commodities  constituting  the  real  wages  of  his 
laborers  with  the  case  of  shoes  or  the  bale  of  cloth 
they  help  to  produce.  Both  wages  and  product  must  be 
expressed  in  terms  of  a  common  measure. 

For  this  purpose  it  is  most  convenient  to  use  money. 
In  point  of  strict  fact  the  individual  employer  does 
not  pay  the  real  wages  of  his  laborers ;  his  agreement  is 
to  pay  them  certain  sums  of  money.  In  spending  their 
money  the  laborers  may  buy  shrewdly  and  get  higher 
real  wages  ;  or  they  may  buy  badly  and  get  less  for 
their  labor.  But  this  does  not  affect  the  profits  of  their 
employer.  His  outlay  is,  in  strictness,  the  money  he 
pays.  The  real  wages  of  his  laborers  are  drawn  from 
the  general  capital  of  the  community :  from  that  portion 
of  the  general  capital  that  consists  of  commodities  in 
the  hands  of  the  retail  dealers. 

Expressing  both  outlay  and  return  in  money,  we  have 
a  basis  for  reckoning  profits.  This  mode  is,  of  course, 
open  to  the  danger  of  error  through  changes  in  the 


254  Political    Economy. 

value  of  money.  But  it  has  the  advantage  of  being 
simple,  and  the  further  recommendation  of  being  the  one 
in  practical  use.  Of  course,  real  profits  consist  in  in- 
creased command  over  commodities  in  general.  In  order 
that  profits  reckoned  in  money  shall  represent  the  real 
result  of  an  employer's  outlay,  it  is  necessary  to  apply 
a  correction  for  any  rise  or  fall  occuring  in  the  value  of 
money  between  the  outlay  and  the  return.  This  is  par- 
ticularly necessary  where,  as  happens  in  the  case  of  fixed 
capital  and  many  other  forms  of  productive  expenditure, 
considerable  periods  of  time  intervene  between  the  outlay 
and  the  completed  return. 

4.  Factors  on  which  Individual  Profits  Depend.  —  Un- 
derstanding this  correction  to  be  made  wherever  nec- 
essary, we  may  say  that  each  employer's  share  in  the 
aggregate  profits  of  industry  depends  on  three  factors : 

(1)  The  cost  to  him  of  his  product  (meaning  thereby 
the  amount  of  money  each  yard,  pound,  bushel,  or  other 
unit  costs  him). 

(2)  The  price  he  obtains  for  it. 

(3)  The  quantity  he  produces   (or  acquires   in   other 
ways).1 

1  The  word  "  employer "  is  to  be  understood  as  including  all  per- 
sons who  operate  with  savings,  whether  they  actually  hire  laborers  or 
not.  Similarly  the  word  "produce"  is  used  in  this  discussion,  to  in- 
clude all  ways  of  acquiring  products  with  a  view  to  profit.  It  would 
cumber  the  treatment  of  profits  too  much  to  speak  separately,  in 
every  case,  of  merchants,  bankers,  carriers,  speculators,  etc.  Further, 
it  is  to  be  remembered  that  the  word  "  laborer "  includes  salesmen, 
book-keepers,  hired  managers,  etc. 


Variable  Elements  of  Money  Cost.  255 

Each  of  these  factors  is  variable.  Each  of  them  may 
differ  in  the  case  of  different  employers.  It  remains  for 
us  to  note  the  principal  causes  of  variation  and  the  ways 
in  which  individual  profits  are  affected  thereby. 

5.  Cost  of  Capital  Differs  to  Different  Employers.  - 
The  cost  of  a  product  to  the  employer  may  be  divided, 
as  we  have  seen,  into  two  general  classes  of  payments : 
first,  the  amounts  paid  for  machinery  and  materials  to 
other  employers ;  secondly,  the  amounts  paid  as  wages 
to  his  own  laborers.  The  cost  of  capital  bought  from 
other  employers  may  vary  in  two  distinct  ways :  it  may 
differ  in  price  at  different  times  and  to  different  buyers; 
secondly,  the  quantity  or  quality  of  product  it  yields 
may  differ  to  different  employers. 

One  employer  may  have  the  sagacity  and  good  fortune 
to  buy  the  most  suitable  articles,  and  to  buy  them  at  the 
most  favorable  time,  and  on  the  most  favorable  terms. 
Another,  through  incapacity  or  inadvertence,  may  buy 
less  shrewdly,  buying  less  suitable  articles,  or  buying 
them  at  the  wrong  time  and  place,  or  in  wrong  quan- 
tity. Prices,  it  must  be  remembered,  are  never  long 
stationary  and  are  never  quite  uniform.  It  is  usually 
possible  to  get  a  good  bargain,  if  one  knows  how  to 
go  about  it.  There  is  always  danger  of  getting  a  bad 
bargain,  unless  one  has  the  requisite  knowledge  and 
takes  the  requisite  care  to  avoid  it. 

Now,  in  paying  for  materials  or  machinery,  the  pur- 
chaser  does  not  merely  replace  to  the  seller  the  savings 
spent  in  getting  them  produced.  The  price  includes  also 


256  Political  Economy. 

whatever  of  profit  the  seller  is  to  have  for  his  share  in 
producing  the  commodities  which  ultimately  result  from 
the  machinery  or  materials.  How  much  the  eventual 
profit  is  to  be  cannot  be  known  yet.  The  buyer  takes 
over  the  chances,  paying  the  seller  a  sum  which  may 
later  prove  to  have  been  indefinitely  greater  or  less  than 
his  fair  proportion.  The  effect  on  the  profits  of  each  is 
obvious. 

Of  course  prices  of  machinery  and  materials,  like  the 
prices  of  other  things,  tend  to  conform,  on  the  average, 
to  the  cost  of  production.  But  the  price  in  any  partic- 
ular case  may  vary  widely  from  this  standard.  Also,  the 
cost  of  production  itself  is  subject  to  changes.  The  em- 
ployer who  buys  when  the  market  price  is  lowest  makes 
higher  profits,  other  things  being  equal,  than  the  one 
who  buys  when  the  market  price  is  high.  The  employer 
who  buys  his  machinery  just  after  an  important  im- 
provement has  been  introduced  in  the  production  of  it, 
has  a  great  advantage  over  the  one  who  had  the  misfor- 
tune to  buy  just  before  the  new  inventions  were  made. 
One  has  the  ill  fortune  to  have  laid  in  a  large  stock  of 
some  necessary  material  just  before  a  great  cheapening 
of  it  through  the  discovery  of  new  sources  of  supply,  or 
just  before  the  discovery  of  a  cheaper  and  better  substi- 
tute makes  the  material  no  longer  necessary.  Another 
has  the  good  fortune  to  escape  loss  by  the  change.  And 
so  on.  Employers  take  individually  the  risks  of  indus- 
try. It  makes  a  great  difference  to  each  whether  his 
risks  in  the  purchase  of  capital  turn  out  well  or  ill. 


Variable  Elements  of  Money  Cost.  257 

Secondly,  the  cost  of  machinery  and  materials  may 
vary  according  to  the  employer's  success  in  getting  the 
best  results  out  of  them  in  actual  use.  One  employer 
may  have  great  skill  in  arranging  the  internal  economy 
of  his  establishment,  in  keeping  down  the  wear  and 
tear  of  machinery  and  buildings,  in  preventing  waste  of 
materials,  and  in  turning  everything  to  the  best  account. 
Another  may  fail  in  one  or  all  of  these  respects,  through 
lack  of  superior  judgment,  or  want  of  energy,  or  through 
over-confidence  in  the  faithfulness  of  subordinates.  Be- 
sides these  and  similar  elements  of  difference,  which 
good  management  may  be  supposed  to  control,  there  are 
not  a  few  others  which  no  human  sagacity  can  foresee  or 
wholly  prevent,  —  such  as  ill  health,  accidental  injuries 
to  machinery,  destruction  by  fire  or  flood,  and  (in  such 
industries  as  farming)  ravages  of  insects,  local  drouths, 
etc.  These  are  matters  as  to  which  scarcely  two  em- 
ployers fare  wholly  alike.  The  result  is  considerable 
divergences  in  the  proportion  of  product  to  outlay  for 
machinery  and  materials. 

6.  Cost  of  Labor  Differs  to  Different  Employers.  —  As 
to  wages  as  an  element  in  the  cost  of  products  to  the 
employer,  it  is  evident  that  here  again  two  things  are 
to  be  taken  into  the  account:  first,  the  rate  of  wages 
paid,  and  secondly,  the  efficiency  of  the  laborers.  Each 
of  these  may  differ  in  the  case  of  different  laborers. 
Both  must  be  taken  into  account  in  order  to  determine 
the  cost  of  each  man's  labor  to  the  employer. 

Wages  for  any  given  grade  of  labor  may  differ  consid- 


258  Political  Economy. 

erably,  as  we  have  seen,  in  different  parts  of  the  country, 
owing  to  the  expense  and  other  difficulties  that  laborers 
meet  in  changing  their  abode.  The  employer  who  has 
his  business  in  a  region  where  wages  are  low,  has,  in  this 
respect,  an  advantage  in  cost  of  labor  over  producers  of 
the  same  commodity  in  other  parts  of  the  country. 

Again,  on  the  side  of  efficiency,  it  is  certain  that  some 
employers  have  the  faculty  of  disposing  and  directing 
their  laborers  in  such  a  way  as  to  turn  their  labor  to 
better  account  than  other  employers  in  the  same  busi- 
ness. With  no  greater  outlay  in  wages  they-  succeed  in 
obtaining  a  greater  product.  It  makes  a  great  difference 
whether  the  parts  of  the  productive  process  are  or  are 
not  apportioned  in  the  best  way ;  whether  labor  is  econo- 
mized in  every  possible  way  or  is  wasted ;  whether  the 
workmen  perform  their  work  with  energy  or  with  slack- 
ness: and  so  on.  These  are  points  that  depend  chiefly 
on  the  ability  of  the  manager.  Other  things  being 
equal,  the  employer  who  is  most  successful  in  these 
respects  gets  his  product  at  the  lowest  cost. 

7.  Cost  of  Natural  and  Other  Advantages.  —  There  is, 
finally,  a  whole  group  of  circumstances  connected  with 
the  natural  advantages  for  production,  as  to  which 
scarcely  two  employers  in  the  same  industry  stand  on 
a  footing  of  entire  equality.  Possession  of  the  best 
kinds  of  the  requisite  natural  wealth,  nearness  to  the 
best  sources  of  materials,  nearness  to  the  best  markets 
for  the  product,  cheap  transportation,  and  other  similar 
advantages,  are  of  great  importance  to  employers.  It  is 


Variable  Elements  of  Money  Cost.  259 

true,  as  we  shall  see  later,  that  those  who  have  the  use 
of  special  advantages  such  as  these,  may  have  to  give 
a  full  equivalent  for  them.  But  the  amount  of  the  pay- 
ment in  any  particular  case  is  a  matter  of  agreement 
between  men.  Here,  as  in  the  purchase  of  machinery  and 
other  capital,  one  employer  may  obtain  special  advantages 
for  less  than  they  are  worth.  Another  may  make  a  bad 
bargain,  may  find  that  he  has  overrated  the  extent  of  the 
advantage,  and,  by  paying  too  much  for  it,  has  increased 
considerably  the  money  cost  of  his  product. 

8.  Interest  on  Borrowed  Savings.  —  Most  employers 
make  more  or  less  use  of  borrowed  savings.  The  inter- 
est they  pay  for  these  loans  may  be  regarded  as  an  item 
in  the  cost  to  them  of  their  product.  The  loan,  it  is 
true,  is  presumably  a  source  of  gain  to  the  borrower. 
It  enables  him  to  do  a  larger  business  than  he  could 
have  done  without  it;  and  from  this  additional  business 
he  expects  to  make  more  than  he  pays  for  the  loan. 
But,  it  remains  true  that  the  interest  is  an  item  in  the 
cost  to  him  of  the  additional  product  he  obtains  by 
means  of  the  loan.  The  lower  the  interest  he  pays,  the 
greater  his  gain,  in  any  given  circumstances,  from  the 
additional  business  done  by  borrowing.  Here,  as  in  so 
many  other  things,  the  employer  of  large  means  and 
established  credit  has  an  advantage  over  employers  of 
small  resources  and  inferior  credit.  The  great  compa- 
nies and  strong  business  houses  can  get  loans  at  consid- 
erably lower  rates  of  interest  than  ordinary  employers 
can,  with  corresponding  advantage  in  making  profits. 


260  Political  Economy. 

It  must  not  be  supposed,  however,  that  a  low  custom- 
ary rate  of  interest  is  on  the  whole  a  thing  to  be  desired 
by  employers.  On  the  contrary  it  is  a  sign  of  low  profits. 
It  shows  that  the  prospects  of  making  gain  by  the  use 
of  savings,  whether  one's  own  or  borrowed,  are  not  very 
encouraging.  In  other  words,  it  shows  that  wages  are 
high  in  comparison  with  the  productiveness  of  labor. 

9.  Advantageous  Sales  as  a  Source  of  Profit. — Assuming 
the  value  of  money  to  be  constant,  or  that  a  correction  is 
made  for  variations  of  its  value,  it  is  easy  to  see  that  the 
profits  of  the  business  man  in  respect  of  any  given  quan- 
tity of  product,  are  measured  by  the  difference  between 
the  money  cost  of  it  to  him  and  the  price  he  obtains 
for  it. 

When  the  price  of  a  product  is  above  that  of  other 
things  produced  by  the  same  amount  of  labor  and  wait- 
ing, either  the  employers  engaged  in  producing  it,  or  the 
laborers,  or  both,  have  higher  rewards  than  the  producers 
of  other  things.  The  sharing  of  the  extra  returns  be- 
tween employers  and  laborers  depends  on  the  greater  or 
less  readiness  with  which  the  laborers  in  other  industries 
can  be  drawn  in  at  need,  to  take  part  in  the  production ^ 
In  cases  where  this  can  be  done  freely,  the  benefit  of 
the  high  market  value  accrues  to  the  employers.  If, 
however,  there  be  any  serious  barrier  to  free  competition 
on  the  part  of  outside  laborers,  the  laborers  who  are  in 
the  industry  may  obtain  a  part  of  the  advantage.  If  the 
barrier,  and  consequently  the  high  market  value,  be  per- 
manent, they  are  certain  to  get  all  of  it. 


The  Money  Return  Variable.  261 

Apart  from  the  special  profits  due  in^particular  indus- 
tries to  high  market  value  of  their  products,  it  is  often 
possible  for  the  individual  employer  to  get  a  higher  price 
for  his  product  than  others  are  getting  for  the  same  ar- 
ticle, or  one  equally  good.  In  the  many  fluctuations  of 
price,  it  often  makes  a  considerable  difference  whether 
one  sells  his  product  to-day  or  holds  it  back  till  to- 
morrow. The  man  who  can  best  foresee  the  course  of 
the  market  has  a  decided  advantage.  This  is  especially 
true  in  those  industries  in  which  contracts  are  made  to 
deliver  goods  in  the  future  at  a  fixed  price.  Much  extra 
profit  is  often  made  by  contracts  entered  into  at  the 
right  moment. 

Again,  the  great  body  of  consumers  are  either  too 
busy  or  too  careless  to  take  the  trouble  of  investigating 
and  comparing  the  qualities  of  different  makes  of  an 
article.  They  are  apt  to  buy  the  kind  they  have  found 
satisfactory  in  the  past,  just  as  they  are  apt  to  buy  of 
the  same  dealer  year  after  year.  This  gives  an  enormous 
advantage  to  producers  who  have  an  established  reputa- 
tion. They  can  charge  more  for  their  goods  than  those 
can  whose  reputation  is  yet  to  be  made ;  and  even  at  the 
higher  price  they  can  find  a  steadier  market  and  a  more 
ready  sale.  Many  a  fortune  is  made  simply  by  the  pos- 
session of  an  established  brand,  or  a  well-known  name. 
The  immense  extension  of  "  advertising  "  in  our  day,  and 
the  many  devices  adopted  to  bring  new  wares  into  notice 
are  sufficient  to  show  how  great  is  the  commercial  value 
of  having  one's  particular  "  make "  of  an  article,  or  one's 


262  Political  Economy. 

particular  shop%  favorably  kept  in  mind  by  as  many 
persons  as  possible. 

10,  Losses  in  the  Sale  of  the  Product.  —  Passing  now 
to  the  cases  in  which  commodities  have  to  be  sold  at  a 
low  price,  it  is  clear  that  the  losses  resulting  from  this 
cause  must  usually  fall  on  the  employer.  The  laborers 
may  suffer  reduction  of  wages,  but  the  employer  may 
suffer  total  loss  of  profits.  Hard  as  it  is  for  laborers  to 
change  occupations,  it  is  still  harder,  in  fact  practically 
impossible,  for  the  employer  to  change.  It  often  hap- 
pens that  the  employers  in  an  industry  are  obliged  to  go 
on  for  a  considerable  period  without  any  profits,  —  per- 
haps even  at  a  loss,  though  at  a  smaller  loss  than  total 
cessation  would  imply.  This  is  one  of  the  risks  every 
employer  must  run.  Whatever  he  produces,  it  may 
happen  that  other  men  shall  unduly  extend  the  produc- 
tion of  the  article,  thus  involving  him  in  difficulties  and 
losses,  which  no  skill  or  forethought  on  his  part  could 
avert. 

There  is,  connected  with  the  sale  of  the  product,  a 
further  danger  of  loss  growing  out  of  the  fact  that 
products  are  so  largely  sold  on  credit.  Every  producer 
is  practically  compelled  to  follow  the  custom  of  his  trade 
in  this  respect.  Those  who  are  fortunate  enough  to  re- 
ceive payment,  when  due,  for  all  they  sell,  probably 
make  higher  profits  because  of  the  risk  they  have  run 
in  selling  on  credit.  Those,  however,  who  are  unfortu- 
nate in  this  regard,  not  only  fail  to  make  a  profit,  but 
even  lose  the  original  savings  invested  in  the  venture. 


Double  Effect  of  Volume  of  Business.  263 

A  few  serious  losses  of  this  kind  may  undo  the  profits  of 
years,  or  may  even  involve  in  bankruptcy  the  employer 
who  incurs  them.  Of  course  here,  as  in  other  matters, 
the  risk  may  be  greatly  reduced  by  careful  management ; 
but  it  is  never  wholly  absent  from  sales  on  credit. 

11.  Scale  of  the  Employer's  Transactions.  —  A  com- 
parison of  the  money  cost  with  the  selling  price  of  the 
product,  shows  the  ratio  of  the  employer's  outlay  to  his 
return,  or  the  rate  of  his  profit.  To  determine  the  total 
amount  of  his  profits  a  third  factor  is  necessary,  namely, 
the  amount  of  business  he  does  on  these  terms.  The 
greater  his  capital,  the  greater,  at  any  given  rate,  will 
his  share  of  the  general  profits  be. 

The  importance  of  the  scale  of  his  transactions  in  this 
respect  is  too  obvious  to  need  discussion.  There  is,  how- 
ever, another  less  obvious  way  in  which  an  employer's 
profits  are  influenced  by  the  volume  of  business  he 
carries  on.  Some  of  the  items  in  the  money  cost  of  a 
product  are  less  in  proportion  to  the  Quantity  produced, 
where  business  is  done  on  a  large  scale  than  where  it  is 
done  on  a  small  scale.  This  is  especially  true  of  what 
may  be  called  the  general  expenses.  It  is  about  as  easy 
to  conduct  a  business  of  a  million  a  year  as  one  of  half 
a  million.  The  purchase  of  supplies,  the  book-keeping, 
the  correspondence,  the  general  oversight  and  planning 
of  the  work,  are  not  much  more  onerous  or  costly  in  the 
one  case  than  the  other.  There  is,  therefore,  a  compara- 
tive saving  of  cost,  in  these  respects,  in  the  larger  scale 
of  business. 


264  Political  Economy. 

Again,  the  large  buyer  can  usually  buy  things  more 
cheaply  than  the  small  buyer.  The  employer  who  pro- 
duces on  an  extensive  scale  can  get  his  materials  and 
machinery  at  lower  prices  than  the  employer  who  uses 
but  small  quantities  in  comparison. 

Thirdly,  in  a  large  establishment  more  effective  divis- 
ion of  labor  is  often  possible ;  also  more  complete  appli- 
cation of  labor-saving  devices.  In  a  large  business  it 
often  happens  that  machinery  can  be  economically  used 
to  do  things  which,  in  a  small  business,  have  to  be  per- 
formed by  hand,  because  there  is  not  enough  of  it  to 
be  done  to  keep  a  machine  busy. 

In  these  and  some  other  ways,  various  economies  in 
the  cost  of  the  product  can  be  introduced  as  the  scale 
of  operations  is  enlarged.  On  the  other  hand,  a  very 
large  business  is  under  some  disadvantages.  The  larger 
the  scale  of  operations,  the  more  difficult  it  becomes 
for  the  employer  to  exercise  a  minute  supervision  over 
all  the  details.  He  has  to  leave  more  to  the  care  of 
hired  assistants,  whose  interest  in  the  business  can  never 
be  as  keen  and  stimulating  as  his  own.  In  a  very  large 
establishment  there  is  apt  to  be  a  good  deal  of  waste, 
through  neglect  of  opportunities  for  small  economies  of 
various  kinds.  The  little  odds  and  ends,  which,  in  the 
yearly  aggregate  amount  to  a  considerable  sum,  are  not 
sufficiently  cared  for.  Then,  there  is  a  limit  beyond 
which  no  ordinary  business  can  be  extended  without  the 
danger  of  losing,  even  in  its  greater  features,  that  unity 
of  management  which  is  essential  to  success.  There  is, 


Growth  of  Business  Corporations.  265 

I  suppose,  a  most  advantageous  scale  of  production,  or 
of  trade,  in  each  case ;  and  the  employer  who  hits  this 
happy  mean  has  the  benefit  of  his  sagacity  in  enhanced 
profits. 

The  most  economical  and  effective  scale  of  operations 
would  seem  to  depend  in  part  on  the  nature  of  the  busi- 
ness, and  in  part  on  the  capacity  of  the  employer  him- 
self. The  tendency  of  our  time  is  undoubtedly  towards 
large  industrial  establishments.  Large  mills,  factories, 
and  stores  seem  to  be  gradually  superseding  the  smaller 
ones.  Business  that  used  to  be  carried  on  by  single  indi- 
viduals and  "firms"  is  now  passing  into  the  hands  of 
incorporated  companies,  with  large  capital  stock  and 
highly  extended  operations.  This  is  practical  evidence 
that,  in  spite  of  some  drawbacks,  the  cost  to  the  em- 
ployer of  each  unit  of  product  is  less  where  production 
is  on  a  large  scale  than  where  it  is  on  a  small  one, — 
provided  only  the  management  be  in  competent  hands. 
Men  who  have  demonstrated  their  ability  to  conduct 
large  enterprises  successfully  are  much  in  demand  as 
managers,  and  are  able  to  obtain  for  themselves  salaries 
which,  a  century  ago,  would  have  seemed  fabulous.1 

The  new  system  seems  to  be  especially  applicable  to 

1  In  the  case  of  corporations  whose  business  is  conducted  by  hired 
managers,  with  or  without  a  board  of  directors,  the  company  is  the 
real  employer,  since  it  supplies  the  savings  and  takes  the  risks  of  the 
enterprise.  The  hired  manager,  as  such,  is  simply  a  skilled  laborer 
in  the  company's  service.  The  arrangement  gives  persons  of  means 
the  chance  to  get  more  than  mere  interest  for  their  savings,  while 
escaping  most  of  the  personal  labor  of  management. 


266  Political  Economy. 

industries  that  need  large  fixed  capital,  as  is  the  case 
in  transportation,  mining,  and  most  kinds  of  manufact- 
uring. Perhaps  the  most  notable  example  is  seen  in  the 
case  of  railroads.  A  generation  ago  a  railroad  extending 
a  couple  of  hundred  miles  was  considered  a  large  one  to 
be  under  one  management.  Now  a  few  great  companies 
control  the  bulk  of  the  railroad  business  of  the  country, 
each  of  them  owning  thousands  of  miles  of  track ;  and 
the  process  of  consolidation  is  still  going  on.  The  great 
improvement  and  cheapening  of  the  service  that  have 
accompanied  the  movement,  though  mainly  due  to  other 
causes,  are  no  doubt  partly  to  be  ascribed  to  the  greater 
efficiency  and  economy  of  the  new  plan.  It  seems  to  be 
a  real  industrial  improvement. 

We  may  note,  in  passing,  that  the  recent  tendency 
towards  combinations  and  "  trusts "  among  mining  and 
manufacturing  companies,  is  a  very  different  thing  from 
the  movement  just  spoken  of.  The  enlargement  of  the 
scale  of  business  was  the  result  of  an  effort  to  lessen 
cost ;  the  trust  is  primarily  designed  to  keep  the  price  of 
an  article  higher  than  it  would  be  under  free  competi- 
tion. That  trusts  do  sometimes  lessen  cost,  by  preventing 
the  waste  of  savings  that  attends  reckless  competition,  is 
no  proof  that  they  are  an  improvement  in  industry.  Free 
competition  has  some  drawbacks,  like  every  other  human 
institution ;  but  it  offers  the  only  sure  guarantee  that 
every  known  device  for  lessening  the  cost  of  commodities 
shall  be  faithfully  and  promptly  applied,  and  that  the 
general  mass  of  men  shall  have  the  benefit. 


Inequalities  of  Profits.  267 

12.  Uncertainty  of  Individual  Profits.  —  It  is  clear  from 
what  has  been  said  that  the  profits  of  the  individual 
employer  depend  on  too  many  variable  elements  to  be 
either  uniform  or  certain.  The  business  man  has  to  bear 
the  risks  of  industry.  At  every  step  in  the  complicated 
round  of  transactions  he  carries  on,  he  is  face  to  face  with 
many  chances  of  loss  as  well  as  of  gain.  The  wages  of 
the  laborer,  the  interest  of  the  lender,  and  the  rent  of  the 
landlord,  may  be  settled  and  secured  in  advance.  The 
employer  alone  must  rely  on  his  own  skill  and  good 
fortune  to  win  his  profits  in  the  results  of  his  venture. 
While,  therefore,  wages,  interest,  rent,  and  even  the  aggre- 
gate profits  of  the  whole  body  of  employers,  are  governed 
by  fairly  definite  principles,  the  profits  of  the  individual 
employer  must  always  remain  largely  a  matter  of  chances. 
It  is  impossible  that  certainty  or  uniformity  should  char- 
acterize the  incomes  of  men  to  each  of  whem  every 
change  in  modes  of  production,  in  the  courses  of  trade, 
in  public  taste,  in  prices,  every  shock  to  credit,  the  acci- 
dents of  times  and  seasons,  may  bring  increased  gains  or 
heavy  losses. 

The  yearly  profits  of  the  individual  are  not  made  at 
a  uniform  rate  on  every  transaction.  They  are  rather  a 
compound  result  reached  by  many  strokes  of  business, 
some  of  them  highly  profitable,  others  indifferent,  and 
still  others  a  source  of  loss.  Nearly  every  man  who 
operates  with  savings  has  his  good  periods  and  his  bad 
periods.  At  times  fortune  seems  to  turn  against  him; 
many  things  go  amiss  and  losses  multiply.  At  other 


268  Political  Economy. 

times  most  things  turn  out  well  and  his  gains  are  large. 
Each  man's  rate  of  profits  depends  on  the  proportion  of 
his  ventures  that  turn  out  well;  and  this,  as  everybody 
knows,  differs  widely  in  the  case  of  different  employers. 

While,  then,  we  hold  that,  under  free  competition, 
profits  tend  to  equality  in  the  various  industries,  we 
must  not  infer  that  this  implies  a  tendency  to  equality 
in  individual  profits.  It  means  only  that  freedom  of  com- 
petition tends  to  keep  all  the  industries  about  equally 
promising,  as  fields  for  the  employer's  enterprise.  It 
remains  true  that  the  employer  who  has  energy,  skill, 
foresight,  large  savings  and  good  fortune,  is  likely  to 
make  much  higher  profit  in  any  industry  than  the  one 
who  is  deficient  in  any  of  these  respects,  even  though 
the  two  should  engage  in  the  same  business,  at  the  same 
time,  and  in  the  same  town. 

NOTE.  —  It  may  seem  to  some  that  the  foregoing  treatment  makes 
too  little  of  the  connection  between  the  individual  employer's  profits 
and  the  production  carried  on  by  his  laborers  and  himself  I  think, 
however,  that  all  who  consider  with  care  the  whole  case,  will  conclude 
that  there  is  no  way  of  identifying  the  profits  of  the  individual  em- 
ployer with  the  contribution  made  towards  the  product  of  industry  by 
his  laborers,  over  and  above  their  real  wages.  In  the  first  place,  as 
pointed  out  in  the  text,  their  real  wages  are  drawn  from  the  capital 
of  the  dealers  from  whom  they  buy  rather  than  from  their  own  em- 
ployer's savings.  In  the  second  place,  though  we  have  to  speak  of 
their  product,  as  if  it  were  something  made  by  them  wholly  apart 
from  other  producers,  we  know  that  in  fact  they  do  only  a  part  of 
the  work  of  producing  a  commodity,  since  they  use,  at  every  turn,  the 
results  of  other  men's  labors.  Their  share  in  production  is  conse- 
quently merged  in  the  general  product  of  industry,  in  ways  that  defy 
distinction,  except  through  the  slippery  and  changeable  medium  of 
value. 


Inequalities  of  Profits.  269 

It  may,  however,  be  urged  that  their  product  and  their  real  wages 
may  be  compared  with  each  other  in  terms  of  the  quantity  of  labor 
represented  by  each.  That  is  no  doubt  true,  but  the  comparison 
would  give  us,  at  best,  their  contribution  to  the  general  mass  of  profits. 
It  would  give  no  certain  measure  of  their  own  employer's  profit,  so 
long  as  prices  may  fail,  and  in  not  a  few  cases  do  always  fail,  of  con- 
forming to  the  quantity  of  labor  each  article  represents.  A  man's 
laborers  may  do  as  well  for  him  in  every  respect  this  year  as  last 
year,  and  for  the  same  rate  of  wages ;  yet  he  may  be  losing  this  year, 
although  last  year  he  may  have  made  large  profits.  If  the  prices  paid 
and  received  by  each  employer  always  followed  cost  of  production, 
or  even  employer's  cost,  the  problem  of  individual  profits  would  be 
vastly  simpler  than  it  is. 

If  we  include  in  employers'  cost  interest  on  borrowed  savings,  it 
may  seem  that  we  ought  also  to  include  the  self-denial  (or  abstinence), 
through  which  employers  provide  savings  of  their  own.  This  would 
be  true  if  our  object  were  to  make  a  complete  analysis  of  the  sacrifices 
employers  must  make  in  getting  commodities  produced.  In  that  case 
we  should  have  to  include  the  personal  labors  of  employers,  as  well  as 
their  abstinence.  But  the  abstinence  and  the  personal  labors  of  the 
employer  are  not  elements  of  cost  in  the  sense  in  which  profits  depend 
on  it.  They  are  rather  the  double  sacrifice  of  which  profits  are  the 
reward.  Cost,  in  the  sense  in  which  it  determines  profits,  consists 
wholly  of  payments  made  to  other  men.  The  name  "  Money  Cost " 
describes  its  real  character. 


CHAPTER    XXII. 

INTEREST   ON   BORROWED    SAVINGS. 

1.  Nature  of  Interest.  —  There  are  in  every  community 
many  persons  who  have  savable  income,  but  are  them- 
selves either  not  willing  or  not  qualified  to  become  em- 
ployers of  labor.  On  the  other  hand,  there  are  always 
employers  who  see  ways  of  profitably  extending  their 
business  beyond  the  limits  their  own  savings  would  im- 
pose. Out  of  these  two  facts  has  grown  up  a  very  ex- 
tensive system  of  commercial  loans.  Under  this  system, 
persons  who  merely  save  are  enabled  to  obtain  a  part  of 
the  profits  of  industry.  They  loan  their  savings  to  em- 
ployers who  agree  to  repay  the  loan  at  a  fixed  date,  with 
an  increase  called  Interest.  It  is  a  part  of  our  task,  as 
students  of  political  economy,  to  consider  how  the  rate 
of  interest  is  determined. 

On  the  side  of  the  borrower  interest  is  a  payment  for 
the  use  of  other  men's  savings.  On  the  side  of  the  lender 
it  is  chiefly  a  reward  for  abstinence.  Since  there  is 
always  a  possibility,  greater  or  less,  that  the  borrower 
may  fail  to  pay  back  the  loan  promptly  and  fully,  the 
rate  agreed  on  includes  something  for  the  risk  the  leuder 
runs,  —  a  sort  of  premium  levied  from  all  borrowers  to 
make  good  the  losses  caused  by  the  failure  of  some 
270 


Interest  no  Part  of  all  Profits.  271 

among  them  to  repay  their  loans.  In  common  usage, 
the  name  of  Interest  includes  both  the  reward  of  absti- 
nence and  the  compensation  for  risk.  Economists  usu- 
ally restrict  the  term  interest  to  the  first  alone.  It  does 
not  greatly  matter  which  use  of  the  word  we  follow,  so 
long  as  we  are  clear  as  to  the  existence  of  both  elements 
in  the  payments  made  by  borrowers. 

The  rate  of  interest,  in  the  popular  sense,  differs  con- 
siderably to  different  borrowers.  This  arises  mainly  from 
differences  in  the  quality  of  the  security  given  for  the 
repayment  of  the  loan.  It  arises  in  part,  however,  from 
differences  in  the  form  of  the  loan,  the  period  for  which 
it  is  to  run,  the  provisions  of  law  regarding  it,  etc.  The 
more  completely  any  given  investment  meets  the  wishes 
or  the  needs  of  borrowers  in  these  respects,  the  lower  the 
rate  of  interest  the  borrower  needs  to  pay.  Thus,  as 
between  bonds  otherwise  equally  desirable,  borrowers 
prefer  those  that  have  long  to  run.  Again,  the  law 
singles  out  certain  bonds  for  the  investment  of  trust 
funds.  United  States  bonds  are  the  only  ones  that  can 
be  lawfully  deposited  as  a  pledge  for  the  redemption  of 
National  Bank  notes.  Of  course  bonds  are  singled  out 
in  this  way  by  reason  of  the  superior  credit  of  the  issuers. 
The  interest  on  them  would  therefore  be  low  in  any  case. 
But  the  special  advantages  conferred  by  law  on  these 
bonds  enable  the  issuers  to  borrow  at  still  lower  rates 
than  they  could  otherwise  do. 

While,  then,  we  must  speak  of  the  rate  of  interest  as  if 
it  were  uniform  for  all  borrowers,  we  must  bear  in  mind 


272  Political  Economy. 

that,  in  practice,  borrowers  pay  very  different  rates  ac- 
cording to  the  quality  of  the  assurance  given  for  repay- 
ment and  all  the  special  features  of  the  loan  in  each 
case. 

2,  Relation  of  Interest  to  Profits.  —  It  is  to  be  under- 
stood that  interest,  as  here  discussed,  relates  only  to 
payments  for  the  use  of  savings  actually  borrowed.  As 
to  savings  owned  by  the  employers  themselves,  we  have 
no  need  to  say  anything.  For  his  sacrifice  in  abstaining 
from  the  use  of  this  wealth,  each  employer  has  no  doubt 
the  prospect  of  a  reward;  but  it  is  combined  when  he 
receives  it,  with  the  reward  of  his  personal  labor.  There 
is  nothing  in  the  nature  of  profits,  nor  in  the  process  by 
which  they  are  gained,  to  tell  us  how  much  is  for  the 
abstinence  and  how  much  for  the  labor  of  management. 
As  well  seek  in  the  hewn  timber  for  some  sign  to  tell  us 
how  much  is  due  to  the  axe,  and  how  much  to  the  man 
who  has  wielded  it.  No  man  can  be  a  true  employer 
without  savings  of  his  own  as  a  basis  for  his  operations. 
If  it  be  assumed  that  for  these  savings  he  has  a  separate 
and  definite  reward,  called  interest,  there  is  at  least  no 
ground  for  assuming  that  this  reward  corresponds  with 
the  interest  he  might  obtain  by  lending  his  savings  to 
other  men,  or  that  any  other  man  would  have  loaned 
him  the  amount  on  any  terms.1 

1  Wages  and  profits  (or  outlay,  return,  and  difference)  are  quanti: 
ties  definitely  marked  out  by  the  very  process  of  carrying  on  produc- 
tion by  means  of  hired  labor.  But  interest,  considered  as  a  reward 
of  all  abstinence,  has  no  such  basis  of  determination.  It  is  merely 
inferred  that  because  employers  pay  such  and  such  rates  for  loans, 


Steadiness  of  the  Supply  of  Loans.  273 

Interest,  so  far  as  actually  determinate,  is  mainly  a 
reward  of  abstinence  separated  from  the  labor  and  risks 
of  employment.  Interest  in  this  sense  is  not  a  universal 
element  or  share  in  all  profits.  It  is  simply  a  payment 
made  by  employers  for  the  use  of  savings  in  addition  to 
their  own ;  the  amount  of  the  payment  being  fixed  in 
advance,  and  due  to  the  lender  in  each  case,  whether 
the  loan  has  been  a  source  of  gain  or  of  loss  to  the 
borrower.  Of  course  there  is  a  relation  between  the  rate 
of  interest  employers  will  agree  to  pay  for  loans,  and 
the  profit  they  expect  to  make  by  means  of  them.  In- 
terest can  never  be,  for  long,  as  high  as  the  general  rate 
of  profit.  How  far  it  may  ordinarily  stand  below  the 
rate  of  profit  depends  very  much  on  the  disposition  and 
inclinations  of  those  who,  in  each  country,  own  the  mass 
of  the  general  savings.  If  they  be  much  averse  to  active 
business,  they  may  forego  a  large  part  of  the  profits  of 
capital,  for  the  sake  of  the  ease  and  supposed  dignity 
of  living  without  a  commercial  occupation.  If,  on  the 
other  hand,  they  be  well  inclined  to  the  stir  and  enter- 
prise of  business  life,  the  rate  of  interest  may  ordinarily 
stand  well  up  towards  the  rate  of  profit.  But  we  may 
safely  assume  that  it  can  nowhere  be  always  equal  to  it. 

3.  Interest  Depends  Immediately  on  the  Demand  and 
Supply  of  Loanable  Savings.  —  Interest  being  a  payment 

they  get  the  same,  and  only  the  same,  returns  for  their  own  original 
savings.  Remembering  that  it  is  by  means  of  his  own  savings  that 
the  employer  lifts  himself  out  of  the  condition  of  a  wage-earner,  and 
makes  the  gains  of  an  employer  possible  for  himself,  we  easily  see  the 
fallacy  of  the  inference. 


274  Political  Economy. 

fixed  by  agreement  between  borrower  and  lender,  it  is 
largely  governed  by  the  same  principles  as  the  price  of 
a  commodity.  There  is  a  current  or  market  rate  depend- 
ing on  the  supply  of  savings  offering  for  loan  at  the  mo- 
ment, as  compared  with  the  demand  for  loans.  There  is 
also,  for  each  country  and  time,  something  like  a  natural 
rate  of  interest,  to  which  the  market  rate  tends  to  return 
after  every  fluctuation.  The  market  rate  tends  to  be 
such  as  to  make  the  demand  from  day  to  day  equal  to 
the  existing  supply.  The  natural  rate  is  that  rate  which 
causes  people  to  save  for  loan  as  much,  and  only  as  much 
as  there  is  a  demand  for  at  that  rate.  The  market  rate 
has  reference  to  some  particular  condition  or  case  of  sup- 
ply and  demand.  The  natural  rate  has  reference  to  the 
strength  of  the  saving  spirit  among  non-employers  who 
have  savable  income,  and  to  the  permanent  or  average 
demand  for  loans. 

The  amount  saved  from  month  to  month  by  non- 
employers  is  fairly  constant.  Many  of  them  save  without 
reference  to  the  interest  they  can  obtain.  Most  of  the 
saving  "  for  a  rainy  day,"  for  old  age,  for  children,  etc.,  is 
probably  of  this  character.  Some  may  even  save  more 
strenuously,  after  what  promises  to  be  a  lasting  decline 
of  interest,  than  they  did  before;  since  the  lower  the 
rate  the  larger  the  principal  necessary  in  order  to  yield 
a  given  income.  Yet  it  is  reasonable  to  suppose  that 
non-employers,  as  a  body,  are  stimulated  to  save  more 
copiously  by  a  high  rate  of  interest  than  by  a  low  one. 
To  the  multitudes  of  people  who  have  no  very  definite 


Demand  for  Loans  highly   Variable.  275 

object  to  save  for,  except  the  general  one  of  increasing 
their  income,  the  difference  between  six  per  cent,  and 
four  per  cent,  may  be  decisive.  The  ever-present  temp- 
tation to  spend  needs  to  be  met  by  a  strong  counter- 
acting influence;  and  the  higher  the  rate  of  interest  on 
loans  the  stronger  the  motive  for  denying  one's  self  the 
immediate  enjoyment  of  one's  savable  income. 

We  may  therefore  assume  that  when  the  market  rate 
of  interest  rises,  the  supply  of  savings  offering  for  loan 
will  increase ;  and  that  when  interest  falls,  the  reverse  will 
happen.  Changes  in  the  supply  of  loanable  savings  tend, 
in  turn,  to  react  on  the  rate  of  interest,  in  the  manner 
already  familiar  in  the  case  of  market  prices. 

4.  Variable  Character  of  the  Demand  for  Loans.  —  The 
objects  for  which  loans  may  be  desired  are  very  numer- 
ous ;  but  they  may  be  classed  under  two  general  heads : 
namely,  commercial  and  non-commercial.  Commercial 
loans  are  those  made  by  business  men  with  a  view  to 
profit.  Non-commercial  loans  are  those  raised  by  gov- 
ernments, cities,  and  private  individuals  for  special 
objects,  such  as  the  prosecution  of  a  war,  the  construc- 
tion of  water-works,  the  paving  of  streets,  the  building 
of  houses,  etc.  'The  usual  motive  in  borrowing  of  the 
latter  kind  is  to  spread  the  burden  of  the  cost  over  a 
number  of  years,  instead  of  taking  it  wholly  out  of  the 
income  of  any  one  year. 

The  call  for  non-commercial  loans  is  subject  to  very 
sudden  and  extensive  changes.  The  breaking  out  of  a 
war  between  two  great  nations  increases  it  enormously. 


276  Political  Economy. 

The  restoration  of  peace  causes  an  equally  sudden  and 
extensive  decrease  of  the  demand.  At  times  govern- 
ments and  cities  are  seized  with  a  feverish  activity  in 
the  construction  of  public  works ;  at  other  times  they 
are  overtaken  by  a  spirit  of  economy,  and  large  expendi- 
tures by  way  of  loan  are  avoided.  These  \  changes  in  the 
non-commercial  demand  for  loans  have  striking  effects 
on  the  rate  of  interest. 

Periods  of  large  borrowing  ought  to  be  followed  by 
periods  of  debt-paying  on  a  large  scale.  But  unfortu- 
nately, the  payment  of  public  debts  is  a  practice  very 
little  in  vogue.  It  calls  for  a  degree  of  fortitude  which 
governing  bodies  rarely  possess.  Obviously  the  payment 
of  public  debts,  wherever  it  does  occur,  has  an  effect  on 
the  rate  of  interest  exactly  the  reverse  of  that  produced 
by  the  public  borrowing.  The  bond-holders  whose  bonds 
are  paid  off  are  under  the  necessity  of  finding  new  bor- 
rowers. This  throws  on  the  loan  market  a  mass  of  old 
savings  in  addition  to  the  amounts  coming  forward  from 
current  saving. 

The  demand  for  commercial  loans  depends  on  the 
condition  of  business ;  and  this  as  we  know  is  highly 
variable.  When  the  product  of  industry  contains  the 
right  proportion  of  each  article;  when  the  general  level 
of  prices  accords  well  with  the  supply  of  currency,  and 
when  money  wages  are  in  such  ratio  to  prices  that  profits 
are  high,  we  have  the  situation  known  as  "good  times." 
At  such  a  time  there  is  a  strong  demand  for  commercial 
loans.  Business  men  are  able  to  see  many  openings  for 


Interest  High  in  Time  of  "  Crisis. "  277 

the  profitable  use  of  savings,  and  accordingly  are  eager 
to  extend  their  [operations.  Under  the  strong  demand 
for  loans,  interest  rises,  and  savings  increase.  Also,  the 
banks  extend  their  deposit  loans  and  bank  currency 
increases.1 

How  long  this  situation  may  last,  and  why  it  must 
come  to  an  end,  are  questions  to  which  no  very  simple 
or  satisfactory  answer  can  be  given.  Probably  no  two 
cases  work  out  quite  alike,  for  there  are  many  ways  in 
which  the  highly  complicated  arrangements  of  civilized 
industry  may  become  deranged.  In  the  various  exten- 
sions of  old  enterprises  and  starting  of  new  ones,  there 
is  always  a  danger  that  the  due  proportion  of  commodity 
to  commodity  may  not  be  preserved.  There  is  a  danger 
that  wages  may  be  raised  to  such  a  level  as  to  leave  no 
sufficient  margin  for  profits.  There  is  a  danger  that  the 
advance  in  prices,  resulting  from  the  increase  of  bank- 
currency,  may  give  rise  to  excessive  bringing  in  of  goods 
from  other  places,  and  that  an  outward  drain  of  specie 
to  pay  for  them  may  bring  the  banks  into  difficulties. 
There  is,  finally,  and  above  all,  a  danger  that  something 
may  occur  to  shake  the  general  confidence,- — especially 
the  confidence  of  the  banks  and  other  lending  institu- 
tions in  the  ability  of  business  men  to  repay  their  loans 
at  maturity.  If  any  of  these  things  happen,  the  pros- 
perous course  of  affairs  usually  comes  to  an  end. 

1  Were  it  not  for  the  artificial  increase  of  loanable  savings  by  the 
expansion  of  bank  deposits,  the  rate  of  interest  would  rise  higher  at 
these  seasons  than  it  does.  (See  Chap.  XV.,  §  7.) 


278  Political  Economy. 


We  have  seen  how  largely  business  is  conducted  on 
credit.  Now  the  great  centres  of  credit  are  the  banks. 
When  manufacturers  or  wholesale  merchants  sell  goods 

o 

on  credit,  they  usually  get  the  notes  or  bills  they  take  of 
the  buyers  discounted  at  the  banks.  With  the  money 
thus  obtained  they  meet  their  own  business  obligations. 

If  the  banks  begin  to  curtail  their  discounts,  two  im- 
portant results  follow.  The  men  who  fail  to  get  loans 
must  at  once  cut  down  their  business  operations,  —  they 
may  even  have  to  suspend  business  altogether.  Secondly, 
the  volume  of  bank  currency  becomes  reduced,  and  there 
is  no  longer  enough  currency  to  match  the  existing  scale 
of  prices.  The  sale  of  goods  begins  to  slacken.  In  a 
word,  the  season  of  prosperity  is  over. 

5.  Interest  in  Times  of  Commercial  Crisis. — The  extent 
and  violence  of  the  revulsion  that  follows  depends  on 
the  circumstances  of  each  case.  Where  the  expansion 
of  credit  has  been  excessive,  and  there  has  been  much 
speculative  trading  based  upon  it,  many  failures  are  sure 
to  occur,  and  the  revulsion  may  develop  into  a  "  panic." 
Where  the  over- use  of  credit  has  been  less  extreme,  the 
immediate  effects  may  not  pass  beyond  a  few  failures, 
a  general  check  to  business  activity,  and  a  prevailing 
distress  among  business  men. 

In  either  case  the  first  effect  a  business  revulsion  has 
on  the  demand  for  loans  is  greatly  to  increase  it.  Busi- 
ness men,  who  have  counted  on  their  ordinary  "  collec- 
tions" for  the  means  to  meet  their  current  obligations, 
suddenly  find  this  resource  failing  them.  They  are  com- 


Interest  Low  in  "Dull  Times"  279 

pelled  to  seek  in  borrowing  the  means  of  maintaining 
their  solvency.  Some  men  also,  who  have  money  enough 
to  meet  their  present  needs,  are  apt  to  become  appre- 
hensive at  such  a  time  lest  they  may  fail  to  get  the  means 
of  meeting  future  obligations.  They  therefore  try  to 
borrow  now  enough  to  make  the  future  secure. 

This  new  and  more  or  less  nervous  demand  for  loans 
is  very  different  from  the  ordinary  commercial  demand. 
The  object  in  view  is  not  to  make  profit,  but  to  avert 
business  ruin.  The  demand  is  accordingly  intense.  In 
time  of  panic  it  becomes  headlong  and  unreasoning. 

While  the  demand  for  loans  is  thus  more  urgent  than 
usual,  the  supply  is  usually  much  smaller  than  usual. 
The  great  lending  institutions,  having  stretched  their 
lending  power  to  its  utmost  limit  in  the  "flush"  time 
just  preceding  the  trouble,  have  little  power  to  aid  the 
business  community  with  fresh  loans.  There  is,  therefore, 
a  great  dearth  of  loanable  savings.1 

1  The  law  prohibits  our  National  Banks  from  granting  new  loans 
whenever  the  reserve  falls  below  the  lawful  ratio  to  the  deposits 
[25  per  cent,  for  city  banks].  This  restriction  tends  to  aggravate 
the  situation  in  time  of  crisis,  because  it  forbids  the  banks  to  do  the 
only  thing  that  can  restore  confidence  and  save  the  business  commu- 
nity from  wide-spread  ruin.  In  the  crisis  of  1873,  the  only  one  since 
the  National  Bank  Act  was  adopted,  the  banks  of  New  York  com- 
bined their  resources  and  broke  the  law,  —  granting  new  loans  when 
their  joint  reserve  was  less  than  half  of  the  legal  requirement.  The 
Bank  of  England,  which  is  the  centre  of  the  English  banking  system, 
has  learned  by  long  experience  that  the  best  way  to  quiet  a  panic  is 
to  lend  more  freely  than  at  ordinary  times,  —  charging,  however,  high 
rates  of  interest.  This  course  it  follows  freely,  not  being  under  any 
legal  restriction  as  to  its  reserve,  nor  as  to  the  rate  of  interest  that 


280  Political  Economy. 

There  is  no  assignable  limit  to  the  rise  of  the  rate  of 
interest  in  such  a  situation  as  this.  Men  have  been 
known  to  pay  two  per  cent,  a  day  for  short  loans  at 
such  times. 

When  the  crisis  is  past,  the  rate  of  interest .  suffers 
a  sharp  decline ;  and  in  the  period  of  depression  that 
always  follows  a  commercial  revulsion,  interest  is  low. 
It  is  a  time  when  business  men  find  it  very  difficult  to 
turn  savings  to  profitable  account.  It  is  a  time  of  falling 
prices,  owing  to  the  diminished  supply  of  money.  (See 
Chapter  XIII.)  Sales  of  goods,  especially  sales  on  credit, 
are  fewer  than  before  the  crisis ;  and  this  means  that 
there  are  fewer  bills  and  notes  offering  to  the  banks  for 
discount.  Loanable  savings  accumulate  on  the  hands 
of  the  great  lenders.  In  order  to  attract  borrowers,  the 
rate  of  interest  has  to  be  placed  very  low,  and  even  this 
usually  fails  of  complete  success. 

These  periods  of  depression  are  in  turn  succeeded  by  a 
time  of  increased  confidence  and  reviving  credit.  Prices 
again  come  into  accord  with  the  supply  of  money,  and 
money  wages  with  both.  A  promise  of  reasonable  profits 
again  presents  itself  to  those  who  have  managing  skill 

may  lawfully  be  charged  for  loans.  The  high  rate  checks  merely 
nervous  borrowing.  The  attempt  so  commonly  made  in  old  times, 
and  still  made  in  some  of  our  States,  to  keep  down  the  rate  of  interest 
by  law,  has  never  had  the  effect  of  protecting  borrowers.  The  result 
is  always  to  make  the  rate  higher  in  time  of  trouble  than  it  would  be 
if  no  legal  limit  existed  ;  for  the  lender  charges  more  en  account  of 
the  risk  he  runs  in  violating  the  law.  All  such  laws  are  foolish  and 
injurious,  —  as  foolish  and  injurious  as  the  kindred  attempt  sometimes 
made  in  former  ages,  to  regulate  prices  by  law. 


Interest  and   Wages.  281 

and  capital.  The  revival  of  industry  means  an  increased 
demand  for  loans  and  a  rise  of  the  rate  of  interest.  It 
remains  high  until  a  new  revulsion  overtakes  the  business 
world. 

We  thus  see  that  the  rate  of  interest  moves  in  cycles, 
following  pretty  closely  the  profits  of  employers.  When 
profits  are  high,  interest  is  high  also.  When  profits  fall 
off,  interest  falls  too. 

6.  Significance  of  the  Prevailing  Rate  of  Interest.  — 
The  fact  that  the  rate  of  interest  follows  so  closely  the 
ups  and  downs  of  business  profits,  suggests  that  there 
is  a  connection  between  the  ordinary  rate  of  interest  in 
a  country  and  the  general  condition  of  its  industry. 
The  ordinary  demand  for  loans  is  a  good  index  of  the 
ordinary  rate  of  profits.  If  the  demand  be  strong  enough 
to  sustain  a  high  rate,  we  may  safely  infer  that  employ- 
ers are  making  high  profits.  We  can  also  infer  that,  in 
comparison  with  the  productiveness  of  labor,  real  wages 
are  low  in  the  country.1 

This  does  not  mean  that  a  high  rate  of  interest  is,  in 
itself,  a  cause  of  high  profits  or  of  low  wages.  Wages 
depend  on  the  volume  of  savings  offered  for  labor,  —  no 
matter  by  whom  offered  nor  at  what  rates  of  interest 
some  part  may  have  been  borrowed.  Profits,  in  turn, 
are  the  excess  of  product  over  wages,  and  this  also  is 
uninfluenced  by  the  rate  of  interest.  A  high  rate  of 
interest  is  merely  a  sign  and  a  result  of  the  fact  that 

1  It  must  be  remembered  that  a  rise  of  prices,  without  a  corre- 
sponding rise  of  money  wages,  means  a  decline  of  real  wages. 


282  Political  Economy. 


savings  are  small  in  proportion  to  the  product  of  indus- 
try. Further,  it  tells  us  nothing  as  to  the  volume  of 
savings,  nor  as  to  the  productiveness  of  labor  in  the 
absolute  sense.  Interest  may  be  high  where  industry  is 
highly  productive,  because  the  spirit  of  saving  is  weak 
among  those  who  have  savable  income.  It  may  also  be 
high  where  the  productiveness  of  labor  is  low,  because 
however  strong  the  inclination  to  save,  the  amount  of 
savable  income  is  small.  In  the  one  case  high  interest 
and  high  wages  prevail  side  by  side;  in  the  other  case 
high  interest  and  low  wages,  —  wages  being  spoken  of 
in  the  absolute  sense  in  both  cases. 

The  rate  of  interest,  then,  tells  us  nothing  about  the 
actual  level  of  wages.  But  it  does  convey  an  intima- 
tion as  to  one  of  the  factors  on  which  wages  depend,— 
namely,  the  strength  of  the  saving  spirit  among  the 
owners  of  wealth.  Other  things  remaining  unchanged, 
a  decline  of  the  ordinary  rate  of  interest  in  a  country 
implies  a  rise  of  wages ;  for  it  implies  a  greater  readiness 
to  save  on  the  part  of  those  who  have  savable  income. 
The  rise  of  wages  and  the  decline  of  interest  are  both 
effects  of  the  same  cause ;  namely,  the  increase  of  saving. 
Other  things  being  equal,  then,  a  low  customary  rate  of 
interest  indicates  a  condition  of  things  more  favorable 
to  the  laborers  than  a  high  customary  rate  does.  For 
employers  the  indication  is  reversed.  Though  they  pay 
low  rates  for  what  they  borrow,  the  situation  implies 
that  they  are  making  low  gains  on  all  the  savings  they 
invest,  —  their  own  as  well  as  what  they  borrow. 


Interest  and  the  Supply  of  Money.  283 

7,  The  Rate  of  Interest  does  not  Depend  on  the  Supply 
of  Money.  —  It  is  common  to  suppose  that  a  high  rate  of 
interest  denotes  a  scarcity  of  money,  and  a  low  rate  an 
abundance  of  it.  This  view  is  entirely  erroneous,  as  there 
is  no  necessary  connection  between  the  rate  of  interest 
and  the  quantity  of  money  in  the  country. 

It  is  true,  no  doubt,  that  savings  offering  for  loan  are 
always  in  the  form  of  money,  but  it  is  not  true  that  all 
money  is  in  the  form  of  savings  offering  for  loan.  The 
money  in  general  circulation  does  not  help  anybody  to 
borrow,  for  the  holders  have  no  thought  of  lending  it. 
It  is  only  the  money  actually  offering  for  loan  that  tells 
on  the  rate  of  interest. 

If  the  bankers  and  other  lenders  should  spend  their 
money,  instead  of  offering  it  for  loan,  there  would  be  no 
less  money  in  the  country  than  there  was  before ;  but 
interest  would  rise  very  much  all  the  same.  In  fact  it 
would  be  an  advantage  if  we  could  drop  money  out  of 
view  in  this  matter,  and  regard  the  offer  of  loans  simply 
as  the  offer  of  savings  in  the  form  most  convenient  to 
borrowers.  The  newspaper  phrase  "money  market,"  in 
the  sense  of  loan  market,  is  a  standing  misuse  of  words. 
The  true  money  market  is  where  money  is  actually  sold, 
that  is,  where  it  is  exchanged  for  goods,  —  not  where 
loans  are  made  in  money  to  be  repaid  in  the  same  article. 
If  money  did  not  exist,  there  would  still  be  loaning  of 
savings,  and  the  rate  of  interest  would  depend  on  the 
same  principles  as  at  present. 

The   rate   of    interest,  then,   is   no   indication  of   the 


284  Political  Economy. 

quantity  of  money  in  the  country.  It  only  indicates 
whether  a  large  or  a  small  proportion  of  the  existing 
stock  is  offering  for  loan.  Accordingly  increase  of  cur- 
rency does  not  lower  the  rate  of  interest.  If  the  currency 
were  increased  a  hundred-fold,  there  would  be  a  hundred 
times  more  dollars  offering  for  loan  no  doubt,  but  the 
number  of  dollars  needed  by  borrowers  would  be  a  hun- 
dred times  greater  also.  As  soon  as  prices  and  money- 
wages  became  adjusted  to  the  new  volume  of  currency, 
each  borrower  would  need  a  hundred  dollars  to  do  the 
work  previously  done  by  one  dollar.  Loanable  savings, 
in  the  sense  of  means  to  carry  on  business,  would  be  no 
greater  than  before  the  increase  of  currency. 

Looking  at  the  case  in  another  way,  both  loan  and 
repayment  consist  of  money.  If  dollars  be  cheapened 
for  borrowing,  they  are  also  cheapened  for  repaying  loans 
and  for  paying  interest.  A  man  can  as  easily  pay  five 
dollars  for  the  use  of  a  hundred  when  dollars  are  dollars, 
as  when  each  dollar  is  only  worth  a  cent.  Both  terms 
of  the  ratio  are  affected  alike  whenever  dollars  are  cheap- 
ened by  increase  of  currency. 

A  high  rate  of  interest  then  is  no  sign  of  a  scarcity  of 
money,  nor  is  a  low  rate  a  sign  that  the  currency  is  large 
in  amount.  The  high  interest  that  prevails  in  a  com- 
mercial crisis  is  due  to  the  scarcity  of  loanable  savings, 
not  to  the  lack  of  money.  The  low  rate  that  prevails 
during  a  depression  is  due  to  lack  of  demand  for  savings, 
not  to  any  excess  of  money.  In  fact  money  never  seems 
scarcer  to  the  mass  of  men  than  in  times  of  depression, 
when  interest  is  at  the  lowest  point. 


Interest  and  the  Supply  of  Money.  285 

An  increase  or  decrease  of  the  currency  may  tempo- 
rarily affect  the  rate  of  interest,  if  it  be  unequally  dis- 
tributed between  the  money  offering  for  loan  and  the 
money  in  ordinary  circulation.  For  example,  the  impor- 
tation of  money  from  abroad  always  lowers  the  rate  of 
interest  for  the  time,  but  this  is  because  the  new  money 
is  imported  by  the  bankers  and  brokers,  and  consequently 
presents  itself.,  in  the  first  instance,  as  an  addition  to  the 
loanable  savings.  Every  dollar  of  specie  imported  adds 
several  dollars  to  the  lending  power  of  the  banks.  Simi- 
larly a  drain  of  coin  for  exportation  raises  the  rate  of 
interest,  because  every  dollar  exported  lessens  by  sev- 
eral dollars  the  ability  of  the  banks  to  grant  loans.  But 
the  effect  in  each  case  is  only  temporary.  As  soon  as 
the  increase  or  diminution  has  time  to  distribute  itself 
equally  over  the  whole  volume  of  the  currency,  interest 
returns  to  its  old  rate. 

If  money  be  brought  into  a  country  in  the  pockets  of 
travellers  and  emigrants,  it  has  no  tendency  to  lower  the 
rate  of  interest  even  temporarily.  It  adds  nothing  to 
the  loanable  savings  of  the  country.  In  fact,  it  would 
tend  to  raise  the  rate  of  interest  until  such  time  as  a 
due  proportion  of  the  increase  of  currency  should  reach 
the  reserves  of  the  banks;  for,  by  raising  prices,  it  would 
stimulate  borrowing  without  adding  to  the  volume  of 
loanable  savings. 


CHAPTER    XXIII. 

PRODUCTIVENESS  OF  NATURAL  AGENTS.  — ECONOMIC 

RENT. 

1,  Natural  Advantages  for  Production,  —  We  have  al- 
ready had  occasion  to  note  the  fact  that  the  natural 
advantages  for  the  production  of  any  given  commodity 
are  not  everywhere  equally  good.  In  the  production  of 
coal,  for  example,  one  mine  may  have  its  deposits  nearer 
to  the  surface,  or  in  thicker  seams,  or  of  better  quality 
than  another.  In  the  production  of  wheat,  one  piece  of 
ground  may  have  better  qualities  of  soil,  a  better  situa- 
tion, or  easier  access  to  fertilizers  than  another;  one 
region  may  have  a  more  favorable  climate  than  another. 
In  the  manufacture  of  paper,  one  mill-site  may  have  a 
more  convenient  water  supply,  or  easier  access  to  fuel 
and  other  materials,  than  another.  In  all  kinds  of  pro- 
duction, nearness  to  the  market  is  an  advantage.  And 
so  on. 

Now  these  differences  in  natural  agents  have  an  import- 
ant effect  on  the  productiveness  of  the  labor  applied  to 
each.  Those  who  have  possession  of  the  better  natural 
facilities  in  each  industry,  are  obviously  in  a  position  to 
obtain  greater  results  for  a  given  outlay  of  labor  and  wait- 
ing than  those  who  carry  on  the  industry  under  less  fa- 
vorable conditions.  If  those  who  work  under  the  relative 


Nature  of  Economic  Rent.  287 

disadvantage  are  able  to  earn  ordinary  wages  and  profits, 
the  others  must  be  getting  something  more  than  this. 

2.  Economic  Rent.  —  We  have  here  a  case  of  what  is 
called  Economic  Kent.  The  term  is  applied  to  every 
excess  of  product  or  of  return  that  is  due  to  the  posses- 
sion of  superior  natural  agents,  or  of  facilities  that  are 
not  open  to  everybody. 

In  studying  this  subject  the  student  must  dismiss  the 
idea  that  the  word  rent,  as  used  in  political  economy, 
necessarily  means  a  sum  paid  for  the  use  of  anything. 
The  rent  of  which  we  speak  here  has  no  necessary  refer- 
ence to  payments  between  men.  It  means  simply  an 
excess  ot  product  or  of  return  that  is  due  to  the  use  of 
a  natural  advantage  not  open  to  all  producers. 

It  makes  no  difference  whether  the  person  using  the 
superior  agent  hires  it  of  another  or  owns  it  himself.  If 
he  hires  it  of  another,  the  rent  may  be  claimed  by  that 
other.  If  he  owns  it  himself,  the  rent  is  his  own.  In 
either  case,  the  term  denotes  simply  the  extra  proctuct 
or  income  that  is  due  to  the  natural  advantage. 

Again  we  use  the  word  rent,  in  common  speech,  to 
denote  payments  for  the  use  of  property  of  any  kind. 
We  speak  of  the  rent  of  a  house,  or  of  an  office,  or  of 
a  piano.  But  payments  of  this  kind  are  never  wholly 
economic  rent.  They  are  largely,  and  in  cases  like  the 
rent  of  a  piano,  wholly  compensation  for  outlay  expended 
in  getting  the  hired  article  produced.  Real  rent,  when 
it  takes  the  form  of  a  payment,  must  be  for  the  use  of  a 
natural  agent  such  as  land,  mines,  water-power,  etc.  And 


288  Political  Economy. 

even  in  the  case  of  natural  agents,  the  payments  called 
rent  are  seldom  wholly  rent  in  the  economic  sense.  If, 
for  example,  a  man  hires  land  that  has  been  improved,  or 
a  mine  that  is  already  in  operation,  a  part  of  the  pay- 
ment, perhaps  the  greater  part  of  it,  is  merely  a  return 
for  the  outlay  made  in  preparing  the  land  or  the  mine  for 
use.  Economic  rent  is  not  a  compensation  for  labor  and 
waiting.  It  has  reference  to  the  inherent  qualities  of 
the  natural  agent  that  yields  it,  regarded  in  its  original 
or  unimproved  condition. 

At  the  same  time  it  is  evident  that  the  advantages  of 
a  particular  spot  of  ground  may  depend  greatly  on  the 
state  of  its  surroundings;  and  these  may  be  indefinitely 
improved  by  human  exertions.  Where  the  owner  of  land 
or  any  other  natural  agent  gets  the  benefit  of  other 
men's  outlay  in  this  way,  the  gain  to  him  is  as  if  the 
whole  advantage  had  been  conferred  by  nature.  To  him, 
therefore,  though  not  to  the  community  as  a  whole,  the 
results  of  the  improvement  are  in  the'  nature  of  rent. 
When,  for  example,  a  new  railway  is  built,  bringing 
cheap  transportation  to  a  region  hitherto  cut  off'  from 
the  great  markets,  the  increased  letting  value  of  the 
lands  may  be  regarded  as  rent  for  the  land-owners,— 
provided,  of  course,  that  the  road  has  been  built  without 
corresponding  expense  to  them. 

3.  No-Rent  Stage  of  Population.  —  Mere  differences  in 
the  quality  of  natural  agents  of  any  kind  would  not 
of  themselves  give  rise  to  rent.  In  fact,  we  shall  pres- 
ently see  that  any  class  of  natural  agents  might  yield 


No-Rent  Stage  of  Population.  289 

rent  even  if  they  were  all  equal  in  point  of  advantages. 
The  true  cause  of  rent,  in  any  class  of  these  agents,  is 
scarcity  of  them  in  comparison  with  the  demand  for 
the  product  obtained  by  means  of  them.  This  demand 
depends  primarily  on  population. 

Perhaps  the  easiest  way  of  getting  clear  ideas  regaid- 
ing  rent  is  to  consider  what  happens  everywhere  as  popu- 
lation increases.  Let  us  take  the  production  of  food  as 
an  example.  We  may  assume  that  the  people  of  a  coun- 
try are  interested  in  obtaining  their  needful  supply  of 
food  in  the  easiest  way.  While  population  is  still  small 
in  proportion  to  the  area  of  land,  there  is  a  wide  option 
as  to  the  portions  to  be  tilled.  We  may  assume  that  the 
farmers  of  the  community  can  discern  the  lands  that  are 
most  favorable  for  their  purpose,  and  that  these  will  be 
cultivated  in  preference  to  poorer  lands. 

While  there  are  still  lands  enough  and  to  spare  of  the 
best  grade,  the  value  of  food  of  any  kind  will  correspond 
to  the  cost  of  producing  it  on  these  lands.  That  is  to 
say,  its  value  will  be  such  as  to  afford  ordinary  wages 
and  profits  for  those  who  raise  it,  but  nothing  over  as 
rent  for  the  land.  For  if-  the  value  were  high  enough 
to  yield  a  rent  for  the  cultivated  area,  those  who  own 
other  lands  just  as  good  would  quickly  bring  theirs  into 
use,  and  too  much  food  would  be  raised.  We  have  these 
two  points  to  start  with :  first,  that  while  population  is 
small,  the  value  of  food  is  governed  by  the  cost  of  raising 
it  on  the  most  advantageous  lands;  and,  secondly,  no 
agricultural  land  affords  a  rent. 


290  Political  Economy. 

4,  Beginnings  of  Rent.  —  At  a  comparatively  early 
stage  in  the  growth  of  a  community,  there  comes  a  time 
when  the  most  advantageous  portions  of  the  soil  are  no 
longer  sufficient  to  supply  the  wants  ot  the  whole  popu- 
lation. When  that  point  is  reached  and  passed,  two  new 
facts  appear.  The  first  is  that  the  value  of  food  begins 
to  stand  at  a  higher  level  than  before :  the  old  price  does 
not  induce  farmers  to  raise  enough  for  all.  The  value 
rises  until  farmers  find  it  profitable  to  till  less  advan- 
tageous lands  than  formerly,  and  it  stays  permanently 
higher  than  before.  If  it  did  not,  the  less  advantageous 
lands  would  not  be  cultivated,  and  the  needful  addition 
to  the  supply  of  food  would  not  be  raised.  Higher  than 
is  sufficient  to  afford  ordinary  wages  and  profits  for  rais- 
ing the  needful  addition  the  value  will  not  go,  —  at  least 
so  as  to  stay.  If  it  did,  more  than  enough  of  these 
lands  would  be  cultivated  and  too  much  food  would  be 
raised.  We  can  therefore  say  that  the  natural  value  of 
food  will  now  be  that  which  affords  ordinary  wages  and 
profits  for  raising  it  on  the  less  advantageous  lands, 
with  nothing  over  as  rent  for  these  lands.  This  is  the 
first  fact. 

The  second  is,  that  those  who  till  the  best  lands  are 
now  able  to  sell  their  crops  for  more  than  enough  to 
afford  them  ordinary  wages  and  profits.  It  is  no  harder 
than  before  to  raise  food  from  these  lands ;  yet  each 
bushel  of  the  crop  sells  for  more  than  before.  The  extra 
gain  thus  accruing  from  the  higher  natural  value  of  the 
crop  is  rent.  If  the  owners  of  these  lands  do  not  them- 


Growth  of  Rent  291 


selves  till  them,  they  may  exact  from  the  cultivators  an 
annual  payment  roughly  equal  to  this  extra  profit. 

5.  Extension  of  the  Rent  Area.  —  So  long  as  there  is 
enough  land  of  the  second  grade  in  point  of  advantages 
to  supply  the  whole  demand  for  food,  the  necessary  addi- 
tions to  the  crop  can  be  obtained  without  higher  cost,  the 
natural  value  of  food  will  remain  steady,  and  no  lands  of 
the  second  grade  will  afford  rent,  But  when  population 
grows  to  such  a  point  that  these  lands  no  longer  suffice, 
the  supply  of  food  again  begins  to  be  deficient,  the  value 
rises,  and  cultivation  is  extended  to  lands  of  the  next 
inferior  grade  in  point  of  advantages.  In  this  new  situ- 
ation, the  natural  value  will  be  that  which  affords  ordi- 
nary wages  and  profits  for  cultivating  the  third  grade  of 
land,  with  nothing  over  for  rent.  This  higher  value 
gives  rise  to  a  further  extra  profit,  or  rent,  from  the 
cultivation  of  the  best  lands.  It  also  makes  the  culti- 
vation of  the  land  of  the  second  grade  yield  more  than 
ordinary  wages  and  profits :  these  lands  also  now  afford 
a  rent. 

The  rent  of  the  better  lands  may  be  looked  at  in  two 
different  ways.  Comparing  the  cultivation  of  rent-yield- 
ing land  with  all  other  ways  of  investing  savings,  we 
may  regard  rent  simply  as  extra  profit,  due  to  the  fact 
that  the  value  of  the  product  is  higher  than  it  needs 
to  be  in  order  to  afford  ordinary  wages  and  profits  to 
the  producers  using  the  better  natural  agents.  This  is 
the  simpler  view.  Secondly,  we  may  regard  it  as  extra 
product  over  and  above  the  amount  obtainable  from  the 


292  Political  Economy. 


least  advantageous  lands,  by  an  equal  outlay  of  labor. 
The  two  views  come  to  the  same  result,  since  the  culti- 
vation of  the  poorest  lands  must  yield  ordinary  profits. 
If  the  labor  that  produces  one  hundred  bushels  from  the 
best  lands  produces  only  eighty  bushels  from  the  least 
advantageous  lands  in  use,  then  twenty  bushels  in  every 
one  hundred  produced  from  the  best  lands  are  economic 
rent.  The  extra  profit  coincides  with  the  value  of  this 
extra  product,  or  twenty  bushels. 

Every  time  that  cultivation  has  to  be  extended  to  less 
productive  lands  than  those  already  in  use,  the  extra 
profit  from  cultivating,  the  better  lands  rises  in  two 
ways.  The  excess  of  product  over  the  least  productive 
land  becomes  greater  than  before ;  and,  secondly,  the 
value  of  each  bushel  must  have  become  higher,  or  cul- 
tivation would  not  have  been  extended.  Money  rents, 
therefore,  rise  more  rapidly  than  rent  in  kind. 

6.  General  Principles  of  Rent.  —  Such  is  the  nature 
and  origin  of  economic  rent.  From  a  consideration  of 
the  facts  in  the  case,  we  are  enabled  to  lay  down  the 
following  general  principles : 

(a)  The  poorest  lands  in  cultivation  at  any  time  yield 
no  rent,  so  long  as  there  are   other  lands   of  the  same 
quality  lying  unused.      The    latent   competition   of   the 
unused  portion  keeps  rent  down  to  zero  on  the  portions 
that  happen  to  be  in  use. 

(b)  The  natural  value  of  food  corresponds  to  the  cost 
of  procuring  the  most  costly  part  of  the  whole  needful 
supply,  —  that  is  to  say,  the  portion  raised  on  the  poorest 
lands  in  cultivation. 


Differences  in  Land.  293 

(c)  All  lands  superior  to  the  poorest  yield  a  rent 
proportioned  to  their  superiority.  This  superiority  is 
measured,  in  the  case  of  any  given  land,  by  the  difference 
between  the  cost  of  its  crop  and  the  cost  of  producing  an 
equal  quantity  from  the  poorest  land  in  cultivation. 

7.  Meaning  of  "best,"  "poorest,"  etc.,  as  applied  to 
Lands.  —  It  is  necessary  to  bear  in  mind  that  the  superi- 
ority of  one  tract  of  land  over  another,  as  a  source  of 
supply  for  a  given  market,  has  reference  to  all  the  points 
of  difference  in  the  case.  It  would  be  a  great  mistake  to 
think  only  of  differences  in  fertility  of  soil,  or  to  suppose 
that  rent  is  ever  a  mere  question  of  bushels  to  the  acre. 
The  superiority  of  the  better  land  over  the  poorest  may 
consist  in  easier  access  to  fertilizers,  greater  nearness  to 
the  market,  cheaper  means  of  transportation,  or  in  any 
other  circumstance  that  affects  the  comparative  cost  of 
the  product  obtained  from  each,  when  brought  to  the 
place  of  consumption.  The  inferior  land  may  be  in  itself 
more  fertile  than  the  other,  but  so  much  farther  from 
the  place  where  the  food  is  needed  that  its  superior  fer- 
tility is  more  than  counterbalanced  by  its  disadvantage- 
ous position.  Rent  has  reference  to  the  whole  advantage, 
and  this  is  nearly  always  a  compound  result,  or  balance 
of  many  points  of  difference.  The  words  " best,"  "poor- 
est," etc.,  applied  to  lands  in  the  discussion  of  rent,  mean 
best  or  poorest  taking  all  the  circumstances  into  account. 

Again  the  relative  advantages  of  different  lands  change 
with  changes  in  agricultural  knowledge,  improved  imple- 
ments, better  facilities  for  transportation,  etc.  The  lands 


294  Political  Economy. 


that  are  best  at  one  stage  in  a  people's  history  may  be 
far  from  being  thought  best  at  another  stage.  Lands 
are  good  or  poor,  in  relation  to  rent,  according  as  they  are 
good  or  poor  for  the  people  who  are  to  use  them. 

8.  The  Law  of  Diminishing  Returns.  —  Our  view  of 
economic  rent  would  be  very  incomplete  if  we  left  out 
of  sight  an  important  principle,  not  yet  touched  on, 
relative  to  the  use  of  natural  agents.  The  amount  of 
product  that  may  be  obtained  from  any  given  supply 
or  extent  of  these  agents  is  not  subject  to  any  fixed  or 
definite  limit.  The  modes  of  using  them  are  such  that 
a  greater  or  a  less  quantity  of  labor  can  be  applied  to 
them  at  will.  The  product  may  be  increased  by  addi- 
tional labor  at  any  time.  But  here  we  come  on  the 
so-called  law  of  diminishing  returns.  The  increase  of 
product  is  usually  found  not  to  be  in  proportion  to  the 
increase  of  labor. 

The  principle  may  be  conveniently  illustrated  in  the 
case  of  farming.  In  any  given  condition  of  the  agricult- 
ural arts,  the  amount  of  food  that  may  be  raised  from 
a  given  piece  of  land,  has  no  fixed  or  inflexible  limit,  but 
depends  on  the  amount  of  care  and  skill  bestowed  on 
the  cultivation  of  it.  It  has  been  well  said  that  no  man 
has  ever  yet  developed  the  full  productive  capacity  of 
a  single  acre  of  ground.  Whatever  the  crop  already 
obtained,  a  larger  crop  may  be  obtained  another  year  by 
more  assiduous  cultivation.  The  soil  may  always  be  more 
completely  pulverized  or  further  enriched ;  seeds  may  be 
more  carefully  selected  or  more  favorably  planted ;  more 


The  Law  of  Diminishing  Returns.  295 

care  may  be  given  to  weeding,  watering,  and  otherwise 
nursing  the  growing  plants,  etc.  Every  such  additional 
exertion  causes  the  yield  to  be  more  copious  in  quantity 
or  better  in  quality  than  before. 

All  this  is  quite  true,  and  is  most  fortunate  for  the 
human  family.  But  the  fact  remains  that  high  cultiva- 
tion is  a  costly  method  of  adding  to  the  food  supply. 
The  same  labor  expended  in  looser  cultivation  of  a  larger 
area  would  procure  a  much  larger  quantity  of  food. 

In  the  application  of  labor  to  any  given  piece  of  land, 
there  is  a  point  of  maximum  return  in  proportion  to 
labor  expended.  This  point  is  found  in  a  comparatively 
rough  and  hasty  cultivation  of  it.  Once  the  point  of 
greatest  proportional  yield  is  reached,  any  additional 
expenditure  of  labor  is  met  by  the  law  of  diminishing 
returns.  Further,  the  higher  the  pressure  already  put 
upon  the  soil,  the  smaller  the  addition  to  the  crop  by 
any  new  application  of  labor. 

These  are  principles  applicable  to  all  the  extractive 
industries.  The  point  of  maximum  return  is,  of  course, 
a  matter  to  be  settled  by  practical  experience  in  each 
case.  It  cannot  be  known  by  any  general  or  abstract 
rule.  Further,  it  is  likely  to  vary  with  every  new  dis- 
covery or  improvement  in  the  mode  of  using  natural 
agents  of  any  kind.  But  for  every  natural  agent,  and 
for  every  state  of  the  productive  arts,  there  is  such  a 
point;  and  it  is  nearly  always  found  to  lie  on  the  side 
of  working  it  at  a  comparatively  low  pressure,  rather 
than  a  high  one. 


296  Political  Economy. 

Up  to  the  point  of  diminishing  returns  it  is  obviously 
a  saving  of  labor  to  draw  needful  food  and  materials  from 
the  agents  already  in  use  at  any  time,  before  extending 
the  area  of  operations.  We  may  therefore  assume  that, 
when  new  lands  or  new  mines  are  brought  into  use, 
being  naturally  no  better  than  the  old  ones,  the  point 
of  diminishing  returns  has  been  reached  upon  those 
already  in  use. 

Conversely,  while  there  are  still  new  lands  open  to 
cultivation,  as  good  in  all  respects  as  the  old,  we  may 
assume  that  additional  supplies  of  food  will  ordinarily  be 
obtained  by  extending  the  area  of  cultivation  rather  than 
by  applying  additional  labor,  with  diminishing  returns, 
to  the  area  already  in  use. 

When  this  is  no  longer  possible,  when  all  the  most 
advantageous  lands  are  already  in  use,  there  are  obviously 
two  ways  of  obtaining  needful  additions  to  the  food  sup- 
ply, —  the  one  by  bringing  less  advantageous  lands  into 
use,  the  other  by  higher  cultivation  of  the  old  lands. 
In  practice,  both  methods  are  applied  simultaneously. 
But  in  order  that  men  shall  raise  additional  supplies  in 
either  way,  the  value  of  food  must  rise  sufficiently  to 
make  the  raising  of  the  increase  a  source  of  ordinary 
profit. 

But,  if  the  raising  of  the  addition  yields  ordinary 
profits,  it  is  clear  that,  taken  as  a  whole,  the  crop  raised 
on  the  old  lands  must  yield  more  than  the  ordinary  rate 
of  profit.  This  extra  profit  is  economic  rent. 

9.  Rent  not  Due  Solely  to  Differences  in  Lands. — We 


Rent  due  to  Scarcity  of  Natural  Agents.         297 

now  see  that  the  existence  of  economic  rent  does  not 
depend  on  the  differences  between  lands  in  point  of 
advantage.  These  differences  simply  give  rise  to  one 
form  or  phase  of  rent ;  it  may  be  that,  in  the  long  run, 
they  will  only  cause  differences  in  rent.  Even  if  all 
lands  were  equal  in  'point  of  advantage,  rent  would  arise 
as  soon  as  needful  additions  to  the  supply  of  food  could 
be  obtained  only  by  cultivating  some  portions  of  the 
whole  beyond  the  point  of  maximum  return.  The  value 
of  food  would  then  have  to  be  permanently  higher  than 
it  was  while  increase  could  still  be  obtained  by  extend- 
ing the  area  of  cultivation,  —  enough  higher  to  make  the 
raising  of  the  addition  profitable  in  spite  of  its  greater 
cost.  The  value  of  the  whole  crop  would  now  follow 
the  cost  of  the  addition. 

We  must  suppose  that,  at  the  old  value,  farming 
yielded  ordinary  profits.  At  the  new  value  it  does  more 
than  this,  and  the  excess  is  economic  rent.  This  point 
may  be  made  more  clear  if  we  keep  the  increase  distinct 
in  our  minds  from  the  old  amount  of  crop.  Of  course  it 
is  optional  with  individual  farmers  whether  to  raise  the 
increase  or  not.  If  for  any  reason  some  of  them  should 
simply  go  on  in  the  old  way,  raising  only  the  old  quan- 
tity from  their  lands,  they  would  have  the  benefit  of 
the  higher  value  just  the  same.  The  addition  to  their 
returns  would  be  economic  rent.  We  may  assume,  how- 
ever, that  the  opportunity  to  employ  additional  labor, 
with  the  prospect  of  ordinary  profits  on  the  additional 
outlay,  would  be  generally  taken  advantage  of  by  farmers. 


298  Political  Economy. 

This  opportunity  would  be  as  good  as  those  offered  by 
the  common  run  of  industries  in  the  country.  It  would 
simply  yield  no  excess  of  profit. 

10,  Rent  and  the  Price  of  Food — If  all  the  farming 
lands  in  the  United  States  were  cultivated  by  tenant- 
farmers,  each  paying  a  full  rent  for  his  land,  would  the 
rents  thus  paid  cause  the  price  of  food  to  be  higher  than 
it  now  is  ?  In  countries  where  the  farms  are  held  at  a 
rent,  would  the  price  of  food  be  lowered  if  the  landlords 
should  make  a  present  of  the  farms  to  the  tenants  ? 

These  are  questions  which  may  seem,  at  first  sight,  to 
require  an  affirmative  answer^  But  anybody  who  con- 
siders carefully  the  nature  of  economic  rent  ought  to 
have  no  difficulty  in  seeing  that  both  questions  must 
be  answered  in  the  negative. 

Where  the  food  supply  is  drawn  from  lands  differing 
in  point  of  advantages,  we  have  seen  that  the  cost  of 
procuring  it  from  the  least  advantageous  lands  fixes  the 
natural  value  of  the  whole  supply.  We  have  also  seen 
that  the  least  advantageous  land  yields  no  rent.  It 
follows  that  rents  have  nothing  to  do  with  settling  the 
value  or  the  price  of  food.  If  all  rents  were  remitted 
to  the  tillers  of  the  better  lands,  this  would  not  alter  in 
the  least  the  cost  of  procuring  food  from  the  poorest 
lands.  If  the  value  should  fall,  this  portion  of  the  sup- 
ply could  no  longer  be  raised  with  a  profit,  and  conse- 
quently would  cease  to  be  raised  at  all.  So  that  if  the 
price  should  fall,  it  would  have  to  rise  again.  The  ten- 
ants of  the  better  lands,  whose  rents  are  remitted,  would 


Rents  not  a  Cause  of  High  Prices.  290 

find  no  greater  difficulty  than  before  in  disposing  of  their 
whole  crop  at  the  old  price.  To  offer  it  for  less  because 
now  they  "  could  afford "  to  do  so,  would  simply  be  to 
hand  over  to  sharper  men  gains  that  were  fairly  their 
own.  We  may  safely  hold  that  they  would  make  no 
such  mistake,  and  that  even  if  they  did,  the  lowered 
price  would  not  last  many  days. 

Kent  as  a  payment  to  the  owner  of  a  natural  agent  by 
the  employer  using  it,  may  well  enough  be  regarded  as 
a  part  of  the  cost  to  the  latter  of  the  product  he  obtains 
from  it :  the  more  he  pays  in  any  given  case  the  less  his 
profit.  But  this  is  only  half  of  the  case.  The  reason 
why  the  employer  pays  rent  is  the  fact  that  he  gets  the 
use  of  a  corresponding  advantage.  For  the  special  item 
of  rent  in  his  outlay,  he  expects  to  have  an  equivalent 
special  item  in  his  return,  —  namely,  the  economic  rent 
yielded  by  the  natural  agent  of  which  he  has  the  use. 

Of.  the  true  cost  of  production  that  fixes  the  value  of 
the  commodity,  it  ought  to  be  clear  that  rent  is  no  part. 
The  cost  to  which  the  value  must  conform  is  that  of  the 
last  needful  addition  to  the  supply.  The  last  needful 
addition,  whether  obtained  by  extending  cultivation  to 
poorer  lands  or  by  higher  cultivation  of  the  lands  already 
in  use,  is  obtained  free  of  rent.  We  conclude,  then,  that 
even  if  all  rents,  in  the  sense  of  payments,  were  remitted, 
economic  rent  would  still  continue  to  accrue,  and  would 
simply  remain,  as  extra  profit,  in  the  pockets  of  the  em- 
ployers having  the  use  of  the  superior  natural  agents. 

We  see  then  that,  instead  of  rent  causing  the  product 


300  Political  Economy. 

to  have  a  high  value,  it  is  rather  the  high  value  that 
makes  the  rent  possible.  The  high  value  and  the  rent 
that  goes  with  it  are  both  due  to  the  scarcity  of  the 
natural  agent  (or  of  the  superior  portions  of  it)  in  com- 
parison with  the  demand  for  its  product.  The  strong 
demand  keeps  the  value  of  the  product  above  the  point 
that  would  correspond  to  the  cost  of  producing  it  under 
the  most  favorable  conditions :  that  is  to  say,  the  cost 
of  obtaining  it  from  the  most  productive  sources  within 
reach,  by  applying  labor  to  them  up  to,  but  not  beyond, 
the  point  of  highest  proportional  return.  As  soon  as 
value  is  such  that  production  from  any  natural  agent 
can  be  pushed  beyond  this  point,  with  ordinary  profit, 
that  natural  agent  has  begun  to  yield  rent.  So  that 
rent  follows  value,  not  value  rent.1 

1  There  is,  however,  one  form  of  rent  of  which  this  is  hardly  true, 
at  least  to  the  full  extent.  I  refer  to  the  rent  of  land  used  for  manu- 
facturing purposes  in  and  about  cities.  To  a  considerable  extent 
these  rents  are  due,  not  to  any  peculiar  advantage  possessed  by  the 
land,  in  and  of  itself,  for  the  purposes  to  which  it  is  applied,  but  to 
the  fact  that  it  could  be  let  at  the  same  rent  for  other  purposes. 
Many  kinds  of  manufacture  can  hardly  be  carried  on,  at  least  on  the 
modern  scale,  at  a  distance  from  the  great  centres  of  population  and 
commerce.  The  advantage  lies  as  much  in  the  mere  aggregation  of 
men  as  in  the  natural  fitness  of  the  place.  But  the  aggregation  of  men 
causes  the  land  occupied  by  the  necessary  buildings  and  the  dwellings 
of  the  workmen,  to  be  at  a  scarcity  value  and  to  command  a  consider- 
able rent.  For  this  rent,  so  far  as  it  is  unavoidable,  the  employer  and 
his  laborers  must  be  compensated  in  the  value  of  their  product.  Of 
course  any  rent  of  manufacturing  sites  that  is  due  to  special  natural 
advantage  for  the  purpose,  follows  the  ordinary  rule,  —  being  offset  by 
the  extra  return  which  the  advantage  brings. 


Improvements  Tend  to  Lessen  Rents.  301 

11.  Improvements  in  Farming  Lessen  Rents.  —  Kent,  as 
we  have  seen,  depends  immediately  on  the  value  of  farm 
produce.  Every  rise  of  natural  value  implies  a  rise  of 
rents.  Kailways  lessen  rents  in  the  crowded  portions 
of  the  world,  by  supplying  the  inhabitants  with  cheaper 
food.  Any  other  agency  that  tends  to  lower  the  value 
of  farm  produce  has  the  same  tendency  to  reduce  rent. 

Of  course,  therefore,  all  agricultural  improvements 
have  this  tendency.  They  lessen  the  cost  of  food,  just 
as  inventions  in  manufacturing  lessen  the  cost  of  manu- 
factured goods.  But  their  action,  especially  in  its  bearing 
on  rent,  is  less  simple  than  that  of  improvements  in 
manufacturing.  They  are  peculiar,  in  that  they  affect 
the  value  of  food,  and  thereby  the  rents  of  the  better 
lands,  not  in  proportion  to  their  effect  on  agriculture  as 
a  whole,  but  in  proportion  to  their  effect  on  the  cost  of 
that  part  of  the  necessary  food  supply,  which  is  most 
difficult  to  procure. 

Agricultural  improvements  are  of  two  general  classes. 
Those  of  one  class  save  labor  in  farming,  but  add  nothing 
to  the  crop ;  for  example,  the  gang-plough  or  the  reaping- 
machine.  Those  of  the  other  class  add  to  the  productive- 
ness of  the  land,  but  without  lessening  the  labor  required 
for  cultivating  a  given  area ,  for  example,  the  introduc- 
tion of  rotation  of  crops  or  the  discovery  of  new  fertil- 
izers. Labor-saving  machines  tend  to  lower  the  value  of 
food  simply  in  the  ratio  in  which  they  lessen  the  cost 
of  raising  it  on  the  least  advantageous  lands  in  use. 
Improvements  of  the  second  kind  have  this  effect  also ; 


302  Political  Economy. 


but  they  may  go  farther  and  make  the  cultivation  of 
the  poorest  lands  needless  By  increasing  the  crop  from 
a  given  area,  they  may  make  a  smaller  area  sufficient. 
Any  improvement  which  should  do  this  would  lower  the 
value  of  food,  and  consequently  rent,  in  two  distinct 
ways :  first,  by  making  a  naturally  better  land  the  regu- 
lator of  cost ;  secondly,  by  increasing  the  productiveness 
of  this  land. 

By  way  of  illustration,  let  us  suppose  the  supply  of 
food  for  a  community  is  drawn  from  three  grades  of  land; 
and  that  the  quantity  of  labor  which  produces  ten  bush- 
els from  the  poorest  grade,  produces  twelve  and  fifteen 
bushels  from  the  other  two  grades  respectively.  Of 
course,  the  value  must  be  such  as  to  make  ten  bushels 
sufficient  to  afford  ordinary  wages  and  profits  for  this 
labor.  That  being  so,  the  price  of  two  bushels  in  every 
twelve,  or  one-sixth  of  the  crop,  raised  on  the  second  grade 
of  land  is  rent;  and  the  same  of  every  third  bushel  raised 
on  the  best  grade.  If  the  price  be  one  dollar  a  bushel, 
there  is  a  rent  of  two  dollars  for  every  twelve  bushels 
raised  en  the  second  grade,  and  five  dollars  for  every 
fifteen  bushels  raised  on  the  best  grade. 

If  now  a  labor-saving  improvement  lessens  by  one-fifth 
the  outlay  required  for  raising  these  quantities,  it  will 
lower  the  price  to  eighty  cents  a  bushel ;  the  money  rent 
of  the  second  grade  will  fall  to  a  dollar  and  sixty  cents 
for  every  twelve  bushels  produced  from  it ;  and  that  of 
the  best  grade  to  four  dollars  for  every  fifteen  bushels 
produced  from  it.  The  saving  in  outlay  is  the  same  for 


Improvements  Tend  to  Lessen  Rents.  303 

all  three  grades  (say  two  dollars) ;  but  the  fall  of  price 
affects  the  better  lands  more  heavily  than  the  poorest, 
because  their  crop  is  greater. 

If,  instead  of  a  labor-saving  improvement,  f,  new  fer- 
tilizer be  discovered  that  increases  by  say  one-third  the 
productiveness  of  labor  applied  to  agriculture,  the  result 
may  be  to  make  the  cultivation  of  the  p'oorest  grade  no 
longer  necessary.  In  that  case  the  value  will  fall  to  cor- 
respond with  the  cost  of  producing  food,  with  the  aid  of 
the  new  fertilizer,  from  the  second  grade  of  land.1  The 
labor  that  previously  raised  twelve  bushels  on  this  land 
will  now  raise  sixteen ;  but  the  sixteen  bushels  will  have 
the  same  price  that  ten  had  previously ;  namely  $10,  or 
62i  cents  a  bushel.  This  leaves  nothing  over  as  rent. 
The  same  quantity  of  labor  will  now  raise  twenty  bush- 
els on  the  best  land ;  but  the  price  of  sixteen  bushels 
will  be  required  to  pay  ordinary  wages  and  profits,  leav- 
ing only  the  new  reduced  price  of  four  bushels  for  rent. 
The  rent  of  the  second  grade  disappears  entirely,  and 
that  of  the  best  lands  is  reduced  to  one-half  of  the  old 
amount,  namely  $2.50,  for  the  given  outlay  of  labor. 

It  is  well  to  note  that  the  fall  of  rent  in  this  case  is 
not  due  to  the  fact  that  the  poorest  land  ceases  to  be 
cultivated.  The  fall  of  rent  and  the  abandonment  of  the 
poorest  lands  are  both  effects  of  the  same  cause,  namely, 
the  decreased  value  of  food.  The  same  effects  would 
follow  from  an  equal  fall  in  value  caused  by  cheapened 

1  Strictly  this  result  requires  that  not  all  even  of  the  second  grade 
shall  be  needed  for  cultivation. 


304  Political  Economy. 

importation  of  food  from  other  regions.  In  fact,  it  must 
be  said  of  all  strictly  agricultural  improvements  that 
they  have  seldom  had  in  practice  the  effect  of  actually 
lowering  the  value  of  farm  products.  The  art  of  tillage 
has  undoubtedly  made  progress ;  but  in  comparison  with 
manufacturing  arid  transportation  the  progress  has  been 
very  slow.  The  improvements  in  farming  would  not, 
of  themselves,  have  done  more  than  to  retard  the  rise  of 
rents.  The  great  and  striking  effects  on  the  value  of  farm 
products,  and  consequently  on  rents,  have  been  brought 
about  by  the  wonderful  cheapening  of  transportation. 

12.  Railways  and  Rent.  —  The  application  of  steam  to 
transportation  has  kept  down  the  value  of  food  in  two 
ways :  first,  by  enabling  people  to  move  away  easily  and 
cheaply  from  the  crowded  parts  of  the  world  to  regions 
where  population  is  sparse ;  secondly,  by  enabling  those 
who  remain  in  the  thickly  peopled  parts,  to  draw  their 
food  and  materials  from  distant  places  at  slight  cost. 
The  first  of  these  effects  has  been  spoken  of  already. 
The  second  is  equally  important. 

The  great  abundance  ot  fertile  land  in  America  would 
not  keep  the  value  of  farm  products  down  in  all  parts 
even  of  our  country,  if  it  were  not  possible  to  carry  the 
product  with  little  labor  from  the  western  farms  to  the 
crowded  districts  of  the  centre  and  East.  Farm  products 
are  bulky  and  heavy.  Without  powerful  means  of  trans- 
portation they  could  not  be  moved  far  except  at  great 
cost. 

This  was  the  ordinary  case  in  old  times.     Before  the 


Railways  Keep  Down  Rents.  305 

introduction  of  canals  and  railways,  it  was  costly  and 
difficult  to  carry  things  from  one  place  to  another,  except 
where  transportation  by  sea  or  river  was  possible.  To 
transport  wheat  even  a  hundred  miles,  by  means  of 
draught  animals,  added  enormously  to  its  cost.  Conse- 
quently, in  a  region  of  dense  population,  farming  lands 
might  yield  a  considerable  rent,  even  though  abundant 
land  could  be  obtained  rent  free  in  regions  comparatively 
near. 

But  the  improvements  in  transportation  made  in  the 
last  fifty  years  have  changed  all  this.  It  is  now  possible 
to  carry  food  and  other  products  of  labor  long  distances 
at  slight  cost.  A  barrel  of  Hour  is  now  carried  one 
thousand  miles  by  land  for  the  sum  of  one  dollar.  The 
application  of  steam  to  transportation,  both  by  land  and 
by  water,  has  in  effect  brought  the  most  distant  places 
very  close  together  for  purposes  of  exchange.1 

The  effect  on  agricultural  rents,  especially  in  the  Old 
World,  has  been  very  marked.  Wheat  may  now  be 
carried  from  Dakota  to  London  for  less  than  it  cost 
formerly  to  carry  it  from  the  centre  of  England.  Agri- 
cultural rents  have  therefore  declined  very  much  in  the 
British  Islands,  and  are  likely  to  decline  still  farther. 
Even  in  the  United  States  the  cheapening  of  transport- 
ation has  produced  effects  hardly  less  striking  on  the 
value  of  lands  in  the  older  States.  Many  lands  that 

1  Mr.  Edward  Atkinson  computes  that  the  labor  of  one  man  is 
now  sufficient  to  transport  the  wheat  supply  for  a  thousand  persons 
from  Dakota  to  New  York,  a  distance  of  1700  miles.  —  Distribution  of 
Products,  page  286. 


306  Political  Economy. 

formerly  yielded  a  good,  if  not  a  bountiful,  return  to 
savings  expended  upon  them,  have  now  quite  fallen  out 
of  cultivation.  The  opening  up  of  the  great  West  has  so 
lowered  the  value  of  farm  produce  that  there  is  little 
profit  to  be  made  now  in  ordinary  farming  in  the  East. 

The  present  condition  of  things  will  last  until  the 
virgin  soils  of  the  West  and  North-west  have  been  so  far 
exhausted,  that  the  manuring  and  other  burdensome 
processes  necessary  in  the  older  countries  have  to  be 
resorted  to.  When  that  time  comes  rents  will  begin 
to  rise  again. 

It  remains  only  to  add  the  obvious  remark  that  a 
decline  in  the  value  of  farm  products  caused  by  cheap- 
ened importation,  is  much  more  disastrous  to  agricultural 
rent  than  a  decline  caused  by  home  improvements  in 
agriculture.  In  the  latter  case,  the  better  lands  have  at 
least  the  benefit  of  the  improvement  as  a  partial  offset 
to  the  fall  in  value ;  but  in  the  former  case  the  fall  in 
value  is  wholly  at  the  expense  of  the  landlords.  Thus, 
if  the  fall  to  eighty  cents,  spoken  of  on  page  302,  were 
caused  by  cheapened  importation,  the  rent  of  the  best 
land  would  fall  to  two  dollars  instead  of  four. 

13,  Rent  of  Building  Lands.  —  City  rents  are  more  con- 
spicuous in  this  country  than  agricultural  rents.  The 
modern  tendency  of  population  is  toward  the  towns,  and 
the  growth  of  building  rents  is  correspondingly  rapid. 
The  sum  paid  for  the  use  of  a  building  in  a  city  consists 
of  two  parts.  One  part  is  simply  a  payment  for  the 
use  of  the  building  itself,  which  is  a  product  of  labor. 


Rent  of  City  Lands.  307 

The  other  part  is  for  the  use  of  the  land  on  which  the 
building  stands.  The  first  is  mainly  replacement  of  sav- 
ings with  interest  thereon;  the  second  is  true  rent. 

The  rent  of  city  lots  is  determined  by  the  same  general 
principles  as  the  rent  of  agricultural  lands.  The  chief 
difference  is  that  here  we  start  usually  from  a  condition 
in  which  the  land  is  already  yielding  rent  for  agri- 
cultural purposes.  Of  course,  land  will  not  be  turned 
into  building  lots  until  there  is  a  prospect  of  its  yielding 
somewhat  better  returns  than  it  yields  as  farming  land. 

The  new  building  lots  in  the  outskirts  of  a  city  may 
be  regarded  as  having  their  rent  determined  roughly  by 
the  agricultural  rent  of  the  land.  As  quickly  as  there  is 
a  gain  to  be  made  by  converting  farming  land  into  build- 
ing lots,  we  may  assume  that  the  conversion  will  ordi- 
narily be  made.  At  the  meeting  line  of  the  two  kinds 
the  difference  of  rents  must  always  be  slight. 

Building  lots  nearer  to  the  centre  of  the  town  have  of 
course  many  advantages  for  business  purposes  over  these 
newly-made  lots.  The  economic  rent  of  each  more  central 
lot  is  equal  to  the  rent  of  an  equal  area  in  the  outskirts, 
plus  the  equivalent  of  its  special  advantages  over  the  lat- 
ter. Since  the  rent  of  newly-converted  lots  must  usually 
be  small,  we  may  say  for  brevity  that  the  rent  of  central 
lots  is  a  sum  equivalent  to  their  superiority,  for  the  uses 
to  which  they  are  put,  over  equal  areas  in  the  outskirts. 

This  is  a  question  of  business  advantage  mainly. 
Other  things  being  equal,  the  merchant  who  has  his 
store  in  the  crowded  thoroughfare  can  sell  much  more 


308  Political  Economy. 


than  the  one  who  has  his  store  in  a  remote  corner  of  the 
town.  Without  charging  higher  prices,  he  can  make 
much  larger  profits. 

If  he  does  not  own  the  ground  he  occupies,  the  owner 
may  exact  as  rent  the  full  equivalent,  in  the  view  of  busi- 
ness men,  of  this  special  advantage.  The  competition  of 
business  men  for  the  possession  of  the  best  sites  may  safe- 
ly be  counted  on  to  enable  him  to  do  this.  Thus  we  have 
for  the  rent  of  business  sites  in  cities  the  same  rule  of 
extra  profits  that  we  found  to  apply  in  agricultural  rents. 

14.  Rent  of  City  Lots  used  for  Dwellings.  —  In  the 
case  of  city  lots  used  as  sites  for  dwellings,  we  cannot 
lay  down  any  so  definite  measure  of  rent  as  in  the  case 
of  business  sites.  Of  course,  lots  that  possess  special 
advantages  for  business  purposes  are  not  likely  to  be  let 
for  residences  at  a  lower  rent  than  could  be  obtained  for 
them,  if  applied  to  the  other  use.  Usually,  however, 
dwellings  and  business  edifices  occupy  separate  quarters 
of  the  city ;  so  that  the  rule  of  extra  profit  can  hardly  be 
applied  universally  as  the  regulator  of  city  rents. 

In  the  case  of  lands  adapted,  or  held  to  be  adapted, 
for  dwellings  only,  rent  depends  on  the  demand.  The 
question  is  simply  how  much  extra  the  people  are  will- 
ing to  pay  for  the  privilege  of  living  in  the  most  de- 
sirable streets  or  neighborhoods.  Here,  as  in  the  case 
of  lots  used  for  business  purposes,  we  take  the  lands  in 
the  outskirts  of  the  city  as  our  starting-point.  Those 
•  lands  may  be  hired,  as  sites  for  dwellings,  for  about  the 
same  rent  as  they  yield  in  agriculture.  The  better 


Rent  of  City  Lands.  309 


sites  will  have  their  excess  of  rent  above  these,  set  by 
the  general  estimate  of  the  social  and  other  advantages 
of  living  upon  them.  If  there  are  a  hundred  of  the  best 
sites,  the  rent  of  them  will  be  set  at  such  an  amount 
as  a  hundred  persons,  and  only  a  hundred,  can  be  found 
to  pay.  If  later  the  number  of  persons  willing  to  pay 
this  amount  of  rent  should  increase,  then  the  rent  of 
these  lots  will  rise  to  a  point  at  which  only  one  hundred 
applicants  for  them  can  be  found. 

Cities  are  becoming  rather  centres  of-  trade  than  places 
of  residence.  The  railways  enable  men  whose  work  lies 
in  the  city,  to  have  their  homes  miles  away  in  the  coun- 
try. This  fact  checks  the  rise  of  house-rent  in  the  cities. 

15.  The  Price  of  Land.  —  Land  that  yields  rent,  or  is 
expected  to  do  so,  may  evidently  be  bought  as  a  mode  of 
investing  savings.  The  price,  through  the  competition 
of  buyers,  tends  to  be  equal  to  the  present  worth  of  the 
expected  rent.  That  is  to  say,  it  tends  to  be  such  a 
sum  as  puts  the  purchase  on  a  level,  in  the  opinion 
of  investors,  with  other  modes  of  getting  interest  on 
savings.  The  price  of  any  piece  of  ground  depends, 
therefore,  on  two  things :  namely,  the  amount  of  rent 
it  is  expected  to  yield ;  and,  secondly,  the  prevailing 
rate  of  interest  on  other  investments.  The  lower  the 
rate  of  interest  the  higher  the  price  of  land  is. 

Since  the  future  rent  is  always  uncertain,  dealings  in 
land  are  apt  to  be  speculative.  The  price  changes  with 
every  change  in  the  general  opinion  as  to  the  future 
course  of  the  rent. 


CHAPTEE    XXIV. 

CONSEQUENCES   OF   DIMINISHING   RETURNS. 

1.  Effect  of  Diminishing  Returns  on  Wages  and  Profits.  — 

The  law  of  diminishing  returns  has  an  obvious  bearing 
on  the  course  of  wages  and  profits  in  a  country  as  its 
population  increases  in  numbers.  When  once  the  popu- 
lation has  reached  the  stage  at  which  the  best  sources 
of  food  and  materials,  worked  at  their  point  of  maximum 
return,  are  no  longer  sufficient  to  supply  the  whole  de- 
mand, individual  wages  or  profits,  or  both,  must  tend  to 
decline.  Further  additions  to  the  number  of  producers 
are  not  followed  by  corresponding  additions  to  the  gen- 
eral product  of  industry,  unless  the  natural  tendency  to 
diminishing  returns  in  the  extractive  industries,  be  offset 
by  increased  productiveness  of  labor  in  other  ways. 

Of  course  the  falling  off  in  proportional  return  does 
not  begin  simultaneously  in  all  the  extractive  industries. 
The  different  kinds  of  natural  wealth  are  nowhere  in 
equal  ratio  to  the  human  need  of  them.  The  resources 
of  some  kinds  may  be  practically  unlimited ;  but  there 
are  others  that  are  never  so.  Among  the  latter  must  be 
placed  the  most  productive  sources  of  the  better  varieties 

of  food,  fuel,  and  clothing,  —  the  articles  of  prime  neces- 
310 


Effects  of  Diminishing  Returns.  311 

sity  for  everybody.  In  the  production  of  these  the  point 
of  diminishing  returns  is  reached  at  a  comparatively 
early  stage  in  the  growth  of  population. 

Now,  in  regions  where  this  stage  has  been  passed, 
the  opportunities  for  making  profit  at  any  given  rate 
of  wages  are  •  governed,  not  by  the  general  or  average 
productiveness  of  labor,  but  by  its  productiveness  under 
the  conditions  which  have  to  be  faced  in  obtaining  the 
last  additions  to  the  product  of  industry.  This  is  a 
point  of  great  importance  in  relation  to  wages  and  profits 
in  a  country  where  increase  of  population  is  attended  by 
diminishing  returns.  The  amount  a  given  number  of 
additional  laborers  can  add  to  the  product  of  industry 
constitutes  the  inducement  open  to  employers  for  engag- 
ing their  services.  No  matter  how  much  other  men  are 
producing,  the  new-comers  must  stand  on  the  basis  of  the 
addition  their  own  exertions  can  make  to  the  general 
product. 

Compelled  by  the  nature  of  the  case  to  apply  their 
labor  to  inferior  natural  agents,  or  under  less  favorable 
conditions  than  the  previous  laborers  have  done,  they 
cannot  produce  as  much  as  the  same  number  produced 
previously.  It  follows  that  either  their  wages,  or  the 
profits  of  their  employers,  must  be  less  than  those  pre- 
viously earned  by  equally  capable  producers. 

But  this  is  only  a  small  part  of  the  case.  Under  free- 
dom of  competition,  there  cannot  be  one  level  of  wages 
and  profits  for  the  former  inhabitants,  and  another  lower 
level  for  the  additional  producers.  The  wages  of  all 


312  Political  Economy. 

equally  capable  laborers,  and  the  opportunities  for  profit 
open  to  all  employers,  must  be  roughly  equal.  Equality, 
in  this  case,  is  brought  about  by  a  decline  of  all  wages 
and  profits  to  the  level  of  those  obtainable  by  the  addi- 
tional laborers  and  their  employers. 

What  is  lost  by  the  general  body  of  producers  in  this 
way  goes  as  rent,  to  the  owners  of  the  better  natural 
agents.  Competition  forces  the  employers  who  have  the 
use  of  the  better  opportunities  for  production,  to  pay 
over  to  the  owners  of  them  an  amount  roughly  equiva- 
lent to  the  economic  rent,  01  excess  of  product  due  to  the 
special  advantage  in  each  case. 

For  example,  let  us  suppose  a  country  has  reached  the 
stage  of  diminishing  returns  in  her  chief  extractive  in- 
dustries, with  a  population  of  twenty  millions,  and  that 
the  population  goes  on  increasing  until  it  reaches  twenty- 
five  millions.  The  effect  on  wages,  profits,  and  rents  will 
depend  on  the  extent  to  which  say  the  last  million  falls 
short  of  adding  to  the  product  of  industry  as  much  as 
each  of  the  original  twenty  millions  produced.  Suppose 
they  add  only  nine-tenths  as  much,  then  it  is,  for  the 
employers  of  labor,  precisely  as  if  the  whole  twenty-five 
millions  produced  only  twenty-five  times  as  much  as  this 
last.  Whatever  they  do  in  fact  produce  beyond  this  may 
be  claimed  by  the  owners  of  the  natural  agents  as  rent. 
While  the  number  of  laborers  has  increased  in  the  ratio 
of  20 :  25,  the  product  from  which  profits  must  be  drawn 
has  risen  only  in  the  ratio  of  20  :  22|,  (i.  e.  20  :  25  x  JL). 
The  balance,  whatever  its  amount,  is  rent. 


Effects  of  Industrial  Improvements.  313 

2.  Diminishing  Returns  Counteracted  by  Improvements.  — 

It  is  obvious  that  industrial  improvements  of  every 
kind  have  an  effect  precisely  the  opposite  of  that  just 
considered.  Every  invention  or  discovery  that  enables 
us  to  produce  a  greater  quantity  of  any  commodity  by 
a  given  amount  of  labor,  makes  the  industry  of  the  com- 
munity more  productive  than  it  was  before,  and  thus 
tends  to  raise  the  wages  and  profits  of  producers. 

The  same  effect  is  produced,  in  the  crowded  portions 
of  the  world,  by  the  importation  of  cheap  food  and  ma- 
terials from  other  countries.  This  lessens  the  pressure 
on  the  home  sources  of  supply,  and  thus  prevents  the  rise 
of  rents  and  the  decline  of  wages  and  profits  as  the 
population  increases.  Herein  lies,  for  the  crowded  parts 
of  all  countries,  the  great  importance  of  improvements 
that  cheapen  transportation. 

We  see,  then,  that  the  actual  course  of  industrial 
returns  in  a  country,  as  its  population  grows,  depends 
on  the  question  whether  the  falling  off  in  the  propor- 
tional yield  of  labor  used  in  its  extractive  industries  is, 
or  is  not,  fully  counterbalanced  by  improvements  in  its 
industries  as  a  whole. 

The  rapid  and  wonderful  improvements  of  the  past 
hundred  years  have  apparently  more  than  counterbal- 
anced the  diminishing  returns  from  the  chief  natural 
agents, — giving  us  for  the  time  an  increased  return  for 
labor  and  waiting.  Whether  this  can  continue  much 
longer,  in  the  face  of  the  enormous  increase  of  popula- 
tion that  is  going  on  in  the  world,  is  at  least  open  to 


314  Political  Economy. 


serious  doubt.  Discoveries  and  inventions  are  striking 
in  their  effects;  but  they  are  somewhat  fitful  and  un- 
certain in  their  coming,  and  each  of  them  is  limited  in 
application.  The  action  of  diminishing  returns,  on  the 
other  hand,  though  silent  and  gradual,  is  certain,  univer- 
sal, and  always  progressive.  That  it  must  in  the  end 
prevail  over  human  ingenuity  hardly  admits  of  a  doubt.1 

3.  Checks  on  Increase  of  Population.  —  Reason  tells  us 
that  there  is  a  limit  to  the  number  of  inhabitants  the 
world,  with  its  limited  resources,  can  sustain.  That  we 
cannot  now  say  definitely  what  the  limit  is,  is  no  ground 
for  denying  its  existence.  It  is  hardly  credible  that  a 
thousand  persons  can  ever  find  sustenance  in  the  average 
space  now  occupied  by  one.  It  is  quite  incredible  that 
a  million  should  ever  do  so. 

Now  the  limit  to  increase  of  population  will  be  reached, 
not  by  a  sudden  shock,  but  by  the  cumulative  action  of 
diminishing  returns.  The  precise  mode  in  which  the 
arrest  of  increase  will  come  about,  will  depend,  in  each 
country,  on  the  behavior  of  the  inhabitants.  There  are 
two  alternatives,  —  the  number  of  births  may  diminish, 
or  the  number  of  deaths  may  increase. 

1  Those  who  argue  the  contrary  forget  how  largely  the  improved 
returns  of  recent  times  are  due  to  mere  redistribution  of  population 
by  emigration  to  new  countries,  and  to  cheapening  of  transportation. 
These  are  devices  that  must  exhaust  their  benefits  comparatively 
soon.  There  are  no  more  New  Worlds  to  be  opened  up.  When 
America  and  Australia  become  as  thickly  peopled  as  England  and 
Belgium,  cheap  transportation  will  be  of  comparatively  little  avail  as 
a  means  of  counteracting  the  effects  of  diminishing  returns  in  the 
older  countries. 


Checks  on  Increase  of  Population.  315 

The  first  of  these  is  called  the  "prudential  check  on 
population."  It  is  a  check  that  is  already  operative  in 
every  civilized  community.  It  is  merely  that  feeling  of 
common  prudence  and  regard  for  the  future,  which  pre- 
vents intelligent  young  people  from  assuming  the  care 
of  families,  without  having  the  means  to  provide  an  ade- 
quate support  for  them.  As  earnings  fall  off  through 
the  action  of  diminishing  returns,  this  motive  may  be 
counted  on  to  restrict  more  and  more  the  number  of 
births  in  every  community  where  the  mass  of  the  people 
are  governed  by  prudence  and  forethought. 

This  check  evidently  rests  on  the  standard  of  living 
which  people  are  accustomed  to,  or  which  prevails  in  the 
social  group  to  which  they  belong.  Few  persons  will 
lightly  adopt  a  course  that  is  sure  to  entail  loss  of  accus- 
tomed comforts  or  of  social  standing.  The  higher  the 
standard  of  living  among  the  mass  of  a  country's  inhabi- 
tants, the  slower  will  be  the  increase  of  its  numbers  and 
the  smaller  its  eventual  population. 

This  principle  has  an  obvious  connection  with  the 
law  of  wages.  It  means  that  the  general  level  of  wages 
in  each  country  depends,  in  the  long  run,  on  the  degree 
of  self-control  practiced  by  the  bulk  of  its  people.  Low 
wages  are  the  inevitable  result  of  reckless  increase  of 
numbers ;  high  wages  are  inseparable  from  restraints  on 
increase.  Nothing  can  prevent  wages  from  eventually 
reaching  that  level,  be  it  high  or  low,  which  the  mass 
of  the  laborers  themselves  look  upon  as  adequate  for  the 
support  of  a  family. 


316  Political  Economy. 

The  second  or  "  positive  "  check  on  increase  of  popula- 
tion comes  into  play  wherever  the  first  does  not  exist,  or 
has  proved  too  weak.  The  prudential  check  acts  through 
fear  of  want ;  this  one  acts  through  want  itself.  Where- 
ever  more  people  are  born  than  can  find  proper  nourish- 
ment and  shelter,  the  death-rate  rises.  A  decreasing  pro- 
portion of  those  that  are  born  reach  maturity.  Diseases 
of  all  kinds  multiply,  finding  ready  lodgement  and  easy 
victims  among  the  badly  housed,  ill-clad,  and  meanly 
nourished  masses  of  poor.  Famines  occur  from  time  to 
time,  with  pestilence  following,  to  carry  off  the  redundant 
population  that  other  destroying  agencies  have  spared. 

These  positive  checks  on  increase  overtake  men,  in 
common  with  the  lower  animals,  wherever  they  multi- 
ply with  brutish  disregard  of  consequences.  It  is  these 
checks  that,  in  the  last  resort,  keep  down  all  forms  of 
animal  life  on  the  earth.  Were  it  not  for  the  attacks 
of  enemies,  and  the  lack  of  suitable  nourishment,  there 
is  no  animal  that  could  not  long  since  have  filled  with 
its  increase  every  inch  of  the  habitable  globe.  Men 
have  two  points  of  great  superiority  over  the  lower 
animals :  they  have  no  living  enemies  to  fear  except 
one  another,  and  they  can  do  much  to  improve  their 
surroundings.  But  without  due  restraint  on  increase, 
they  eventually  expose  themselves  to  limiting  forces  no 
less  terrible  and  effective  than  those  that  restrict  lower 
forms  of  life. 

These  doctrines,  as  to  the  ultimate  limits  of  popula- 
tion, are  known  as  Malthusianism,  from  the  name  of 


Wages  under  Diminishing  Returns.  317 

Mr.  Malthas,  the  economist  who  first  expounded  them. 
They  have  been  frequently  controverted,  especially  by 
persons  who  did  not  clearly  understand  them ;  but  they 
seem  to  rest  on  very  solid  foundations.1 

4.  Sharing  of  the  Loss  from  Diminishing  Returns. — The 
division,  between  laborers  and  employers,  of  the  loss 
from  diminishing  returns,  follows  the  principles  stated  in 
Chapter  XVIII.  The  question  is  how  the  increase  of 
savings,  in  the  sense  of  real  savings,  compares  witli  the 
increase  of  laborers  seeking  employment.  If  savings, 
measured  in  the  things  that  laborers  need,  increase  as 
fast  as  the  number  of  laborers,  the  whole  loss  falls  on 
profits.  So  far,  however,  as  savings  fall  short  of  keeping 

1  It  is  important  to  remember  that,  at  any  given  rate  of  increase, 
the  absolute  growth  of  numbers  in  a  country  becomes  more  and  more 
rapid  as  time  goes  on.  If,  for  example,  the  United  States,  starting 
with  a  population  of  sixty  millions,  were  to  go  on  doubling  its  num- 
bers every  thirty-three  years,  the  absolute  increase  in  each  successive 
period  would  be  as  follows :  — 

Increase  Population  at  end  of  period. 

First  period 60,000,000  120,000,000 

Second  period        ....        120,000,000  240,000,000 

Third  period 240,000,000  480,000,000 

Fourth  period        ....        480,000,000  960,000,000 

In  the  ninth  period  (end  of  three  hundred  years),  the  increase 
would  be  15,360,000,000,  bringing  the  total  population  up  to  30,720,- 
000,000.  In  the  thirtieth  period  (end  of  one  thousand  years),  the  in- 
crease would  be  32,212,254,720,000,000,  bringing  the  total  population 
up  to  64,424,509,440,000,000.  It  is  easy  to  see  that  a  uniform  rate  of 
increase  must  in  the  end  make  the  mere  question  of  standing-room 
a  matter  of  difficulty,  —  to  say  nothing  as  to  the  means  of  supporting 
life.  Checks  on  the  rate  of  increase,  and  eventual  arrest  of  all 
increase,  would  thus  seem  to  be  a  physical  necessity. 


318  Political  Economy. 

pace  with  the  increase  of  laborers,  the  loss  is  thrown  on 
wages. 

In  order  that  savings  shall  increase  as  fast  as  laborers, 
it  is  obviously  necessary  that,  as  time  goes  on,  an  increas- 
ing proportion  of  all  that  is  produced  shall  be  saved  for 
investment,  —  and  this  in  spite  of  the  declining  returns. 
This  would  imply  that  profits  were  high  at  the  outset, 
and  that  the  spirit  of  saving  is  steadily  growing.  Where 
these  conditions  are  fulfilled,  the  loss  from  diminishing 
returns  may  fall  for  generations  mainly,  or  even  wholly, 
on  the  employing  class.  But  of  course  there  is  a  limit, 
beyond  which  the  decline  of  profits  could  not  go  without 
arresting  increase  of  savings.  There  is  a  necessary  rate 
below  which  even  the  previous  volume  of  savings  would 
not  be  maintained.  As  this  point  is  approached,  the  loss 
from  increased  pressure  on  natural  agents  must  fall  more 
and  more  on  the  laborers. 

It  is  well  to  note  the  precise  mode  in  which  dimin- 
ishing returns  take  effect  on  wages.  The  two  principal 
items  in  the  expenses  of  a  laborer's  family  namely,  tene- 
ment and  table,  are  precisely  the  things  that  are  most 
affected  by  increase  of  population.  At  any  given  scale 
of  money-wages,  a  rise  in  house-rents  and  in  the  price  of 
food  leaves  a  smaller  amount  for  spending  in  other  ways. 
Unless,  therefore,  other  things  are  greatly  cheapened,  or 
money-wages  rise,  it  becomes  impossible  for  a  laborer 
to  maintain  a  family  in  the  former  degree  of  comfort. 
Where  this  occurs,  the  decline  of  real  wages  may  call 
into  greater  activity  the  prudential  check  on  increase  of 


Rents  not  Necessarily  Lost  to   Wages.  319 

numbers.  If  it  does,  the  ratio  of  money-savings  to  the 
number  of  laborers  will  gradually  change  in  favor  of 
the  laborers,  and  real  wages  will  rise  again.  If  it  does 
not,  the  result  will  be  a  permanent  and  progressive  low- 
ering of  the  condition  of  laborers  and  their  families.1 

The  whole  matter  depends,  then,  on  the  working  of 
the  principles  that  govern  savings  on  the  one  hand,  and 
growth  of  population  on  the  other.  Every  circumstance 
that  favors  increase  of  savings,  or  repression  of  the  num- 
bers seeking  employment,  tends  to  preserve  the  mass  of 
mankind  from  loss  of  earnings  by  reason  of  diminishing 
returns  from  natural  agents. 

5.  Results  Modified  by  use  of  Rents  in  Paying  Wages.  — 
On  the  side  of  savings  there  is  one  further  circum- 
stance to  be  considered.  There  is  one  kind  of  income 
that  increases  as  the  proportional  return  for  labor  dimin- 
ishes. The  rise  of  economic  rent  makes  the  behavior  of 
the  rent-receiving  class  an  element  of  considerable  and 
ever-growing  importance,  in  determining  the  course  of 
wages.  Though  rent  must  be  deducted  from  the  product 
of  industry  when  the  question  is  to  find  the  profits  on 
past  outlay,  it  remains  a  part  of  the  product  of  industry 
when  the  question  is  of  present  resources  for  paying 
wages.  Income  from  rent  may  be  saved  and  used  in 

1  Possible  rise  in  the  cost  of  gold  is  intentionally  omitted.  It 
would  doubtless  be  more  accurate,  though  less  clear,  to  state  the  prin- 
ciple thus :  When,  taken  as  a  whole,  the  things  constituting  real 
wages  become  more  costly,  real  wages  must  decline,  unless  an  in- 
creased proportion  of  the  currency,  in  its  circuit,  be  turned  into 
money-wages.  See  p.  200,  top. 


320  Political  Economy. 

hiring  laborers  as  readily  as  income  of  any  other  kind. 
Just  as  in  the  case  of  profits,  what  is  lost  to  the  laborers 
through  rent,  is  not  the  amount  the  landlords  receive, 
but  the  amount  they  consume. 

Here,  then,  is  a  source  from  which  increase  of  savings 
may  be  looked  for  as  population  increases.  It  is  prob- 
able that  rent-receivers  spend  more  freely  on  themselves 
than  other  classes ;  but  they  are  not  exempt  from  the 
common  eagerness  for  increase  of  wealth.  Even  in  coun- 
tries where  they  form  a  separate  class,  mostly  abstaining 
from  active  business,  their  savings  have  a  great  influence 
iri  sustaining  the  rate  of  wages  in  the  face  of  diminished 
returns.-  Further,  as  a  class,  landlords  usually  employ 
many  servants  and  personal  attendants,  —  so  that  a  part 
even  of  their  spendings  are  in  aid  of  wages.  It  would 
therefore  be  a  great  mistake  to  suppose  that  whatever 
accrues  as  rent,  out  of  the  current  product  of  industry, 
is  thereby  withdrawn  from  the  support  of  laborers.  It 
may  be  paid  to  them  for  their  help  in  the  production 
of  commodities  that  are  still  in  the  future,  or  for  any  of 
those  non-productive  services  that  rent-receivers  so  com- 
monly demand. 

This,  however,  does  not  invalidate  the  principle  stated 
in  §  1.  It  does  not  alter  the  law  of  diminishing  returns. 
It  merely  tempers,  at  any  given  time,  the  action  of  the 
law  in  the  case  of  wages.  It  means  simply  that,  as 
population  increases,  the  source  of  wages  does  not  con- 
tract, relatively  to  the  number  of  laborers,  as  rapidly  as 
the  returns  for  additional  labor  fall  off.  Where  economic 


Rents  may  become   Wages.  321 

rent  exists,  the  industrial  product  from  which  wages  may 
be  drawn,  exceeds,  by  the  amount  of  the  rent,  the  product 
on  which  employers  must  rely  for  their  profits. 

The  situation  is,  therefore,  more  favorable  for  the 
laborers  than  it  would  be  if  all  the  natural  agents  were 
as  poor  as  the  poorest  in  use.  But  it  is  correspondingly 
less  favorable  for  the  employers.  So  far  as  rents  are 
turned  into  wages,  thus  keeping  wages  up  in  spite  of 
diminishing  returns,  the  result  is  to  throw  the  brunt 
of  the  loss  on  profits.  The  consequent  decline  of  profits 
must  eventually  check  the  aggregate  How  of  savings 
from  all  sources.  The  conversion  of  rent  into  wages 
cannot,  therefore,  in  the  long  run,  protect  the  laborers 
from  the  consequences  of  undue  increase.  It  may  post- 
pone, but  it  cannot  prevent,  the  ultimate  fall  of  wages. 
Its  eventual  effect  may  only  be  to  afford  the  reduced 
scale  of  wages  to  a  larger  population  than  could  find 
employment,  even  at  that  rate,  if  the  owners  of  the 
better  natural  agents  consumed  the  whole  rent  them- 
selves in  the  form  of  luxurious  commodities. 

QUESTIONS    AND    EXERCISES. 

1.  What  circumstances  determine  the  normal  level  of  wages  in 
a  community  ? 

2.  Why  are  wages  higher  in  some  countries  than  in  others  ? 

3.  Show  that  real  wages  depend  on  the  relative  height  of  money- 
wages  and  prices  (including  house-rents). 

4.  If,  for  the  coming  year,  all  persons  who  have  money  to  spare 
should  spend  it  in  buying  goods  for  their  own  use,  what  would 
the  effect  be  on  wages? 


322  Political  Economy. 


5.  What  are  the  grounds  for  holding  that  the  general  level  of 
wages  cannot  be  raised  by  strikes  ? 

6.  Mention  circumstances  that  would  be  likely  to  depress  mar- 
ket wages  below  the  normal   level,  and   describe   the  process  of 
recovery  in  such  a  case. 

7.  In  what  sense  do  the  wages  of  the  present  time  depend  on 
past  savings  ? 

8.  How  do  labor-saving  inventions  affect  wages  ? 

9.  Why  is  it  difficult  to  ascertain  the  precise  rate  of  profits  at 
any  time  ? 

10.  What  do  the  aggregate  profits  of  the  whole  body  of  em- 
ployers depend  on? 

11.  Show  that  aggregate  profits  may  rise  without  a  fall  of  real 
wages,  and  that  real  wages  may  rise  without  a  fall  of  profits. 

12.  Name  the  three  principal   factors  on  which  the  profits  of 
the  individual  employer  depend.     Show  how  a  change  in  any  one 
of  these  affects  his  profits. 

13.  How  do  you  account  for  the   notable   differences  in  the 
profits  of  individual  employers? 

14.  Distinguish  between  economic  rent  and  rent  in  the  popular 
sense.     Is  the  rent  of  a  city  house  economic  ? 

15.  How  do  railroads  affect  rents? 

16.  Explain  carefully  the  connection  between  rent  of  land  and 
the  price  of  food? 

17.  What  is  meant  by  the  law  of  diminishing  returns? 

18.  What  is  the  error  in  assuming  that  wages  may  be  discov- 
ered at  any  time  by  deducting  profits  and  rent  from  the  product 
of  industry?     What  would  the  remainder  be? 

19.  On  what  does  the  normal  rate  of  interest  depend?     Is  it 
affected  by  changes  in  the  supply  of  money  ?     Mention  circum- 
stances that  cause  the  market  rate  of  interest  to  be  high. 

20.  What  does  the  price  of  land  depend  on  ?     Why  is  it  more 
variable  than  other  prices? 


CHAPTER    XXV.  - 

EXCHANGE    OF    PRODUCTS    BETWEEN    SEPARATE    COM- 
MUNITIES,   OR   INTERNATIONAL   TRADE. 

WE  must  now  enter  upon  a  subject  involving  very 
considerable  difficulties  in  itself,  and  made  doubly  diffi- 
cult by  the  apparently  endless  controversies  that  are 
connected  with  it.  It  is  needless  to  associate  this  little 
book  with  one  side  or  the  other  in  the  issue  between 
Free  Trade  and  Protection.  But  the  exchange  of  prod- 
ucts between  whole  communities  of  men  is  too  interest- 
ing and  important  to  be  passed  over  without  discussion 
in  any  general  study  of  economics.  I  propose,  therefore, 
to  set  down  in  this  chapter  certain  general  truths  and 
elementary  facts  in  connection  with  foreign  trade,  as  to 
which  I  suppose  all  intelligent  men  would  agree  in  sub- 
stance, however  much  they  might  differ  in  their  ways 
of  interpreting  them.  In  the  next  chapter  I  shall  try  to 
state,  as  briefly  and  impartially  as  I  can,  the  two  oppos- 
ing views  as  to  the  benefits,  or  the  injurious  effects,  of 
unrestricted  foreign  trade. 

1.  International  Trade  an  Exchanging  of  Products. — 
The  first  thing  to  note  is,  that  trade  between  communi- 
ties, like  all  other  trade,  is  always  at  bottom  an  exchang- 
ing of  products.  The  exchange  is  disguised,  but  less  so 

323 


324  Political  Economy. 

than  in  the  case  of  exchanges  within  each  community. 
It  is  not  involved  with  the  payment  of  wages.  But 
money  is  employed  with  the  same  complicating  effect. 
The  importation  of  goods  is  carried  on  by  a  different 
set  of  men  from  those  who  carry  on  the  exportation  of 
goods.  Again,  the  goods  exported  are  not  always  sent 
to  the  place  from  which  the  imports  come.  Yet  it  is 
easy  to  demonstrate  that  every  country  pays  for  its  im- 
ports by  means  of  exports ;  and  this  not  in  any  loose 
or  half  figurative  sense,  but  in  strict  and  literal  fact. 

In  the  trade  between  communities  a  special  form  of 
paper  currency  is  used,  which  has  not  yet  been  spoken 
of,  —  namely,  Bills  of  Exchange  or  Drafts.  The  nature 
and  use  of  bills  of  exchange  may  best  be  seen  from  an 
example.  Suppose  A.  B.  of  New  York  sends  a  cargo 
of  wheat  to  C.  D.  in  Liverpool,  he  does  not  ordinarily 
wait  for  C.  D.  to  send  him  money  in  return.  Instead  of 
this  he  draws  a  bill  on  C.  D.  for  the  amount,  and  sells 
it  to  an  exchange  broker,1  getting  in  this  way  the  means 

1  Exchange  brokers  are  a  class  of  bankers  who  buy  and  sell  bills  of 
exchange.  In  this  country  the  ordinary  banks  act  as  exchange  brok- 
ers. Bills  of  exchange  vary  in  form.  They  differ  from  checks  in  two 
important  particulars :  they  may  be  drawn  on  any  person  who  owes 
money  to  another ;  and  the  time  for  making  the  payment  (that  is  to 
say,  whether  "  at  sight "  or  in  a  certain  number  of  days  "  after  sight ") 
is  always  mentioned  in  the  bill.  The  following  specimen  will  serve  to 
show  how  A.  B.  draws  on  C.  D.  in  favor  of  Smith,  Jones  &  Co.,  the 
purchasing  brokers : 
Exchange  for  £1000.  NEW  YORK,  January  2, 1889. 

Sixty  days  after  sight  pay  to  the  order  of  Smith,  Jones  &  Co.  one  thousand 
pounds  sterling,  for  value  received,  and  charge  the  same  to  account  of 
To  C,  D.,  Liverpool,  England.  A.  B. 


Exports  Pay  for  Imports.  325 

to  buy  a  fresh  cargo.  The  broker  forwards  the  bill  to 
his  London  "correspondent,"  who  attends  to  the  collec- 
tion and  places  the  amount  to  the  broker's  credit. 

Similarly,  when  E.  F.  of  New  York  imports  a  cargo  of 
steel  rails  from  G.  H.  in  Birmingham,  he  does  not  for- 
ward cash  in  return,  but  goes  to  the  broker  for  a  bill. 
The  broker  sells  him  a  bill  on  his  London  "  correspond- 
ent." This  is  sent  to  G.  H.,  who  readily  obtains  the 
money  for  his  steel  rails  by  means  of  it. 

Thus  the  bill-brokers  manage  the  collections  for  goods 
exported  and  make  the  payments  for  goods  imported. 
They  are  able  to  do  this  very  cheaply,  because  they  can 
ordinarily  use  the  proceeds  of  the  bills  they  buy  from 
exporters,  to  meet  the  bills  they  sell  to  importers.  For 
example,  in  the  case  given  above,  the  money  collected 
from  C.  D.  is  simply  turned  over  to  G.  H.  In  this  way 
the  wheat  sent  out  by  A.  B.  is  made  to  pay  for  the  steel 
rails  imported  by  E.  F.  The  bill-brokers  contrive  very 
easily  to  balance  off  all  our  obligations  to  the  various 
countries  of  Europe  against  their  indebtedness  to  us. 
In  this  way  hundreds"  of  millions'  worth  of  goods  may  be 
paid  for  without  the  actual  sending  of  a  single  dollar. 
There  could  be  no  clearer  proof  needed  to  show  that 
international  trade  is  strictly  an  exchange  of  products. 

2.  The  Rate  of  Exchange.  —  The  exchange-brokers 
make  their  profit  by  charging  a  little  more  for  the  bills 
they  sell  than  they  pay  for  the  bills  they  buy.  Both 
their  buying  price  and  their  selling  price  may  rise  or 
fall  together.  Exchange  on  foreign  countries  may  be  at 


326  Political  Economy. 

a  premium  or  at  a  discount,  depending  on  the  relative 
demand  and  supply  of  bills. 

When  exports  of  merchandise  exceed  imports,  the 
bills  brought  to  the  brokers  by  the  exporters  exceed  in 
amount  those  called  for  by  the  importers, —  the  supply 
exceeds  the  demand.  In  this  situation  fhe  price  falls. 
In  the  reverse  case,  —  that  is,  when  imports  exceed  ex- 
ports,—  importers  demand  more  bills  of  the  brokers  than 
exporters  are  bringing  to  them  for  sale,  and  the  price 
of  bills  rises. 

Whatever  the  relative  demand  and  supply  of  commer- 
cial bills,  the  brokers  stand  ready  to  buy  all  that  are 
offered  to  them,  and  to  sell  as  many  as  are  called  for. 
But  when  they  sell  faster  than  they  buy,  they  do  so  at 
the  risk  of  having  to  bear  the  expense  of  sending  over 
gold  to  cover  the  balance;  for,  just  as  in  the  case  of  a 
private  person  drawing  on  a  bank,  they  must  not  over- 
draw their  account  with  the  foreign  banker  on  whom 
they  sell  bills.  In  the  reverse  case,  they  buy  bills  with 
the  certain  prospect  of  having  to  bring  the  proceeds 
home.  They  cannot  go  on  indefinitely  paying  out  money 
at  home'  for  the  right  to  collect  money  abroad,  without 
some  way  of  replenishing  their  home  supply.  But  if 
customers  are  lacking  for  the  money  they  have  to  their 
credit  abroad,  they  can  at  least  bring  it  home  for  use 
in  buying  more  bills.  The  cost  of  thus  sending  money  in 
the  one  case,  and  of  bringing  it  in  the  other,  gives  the 
limit  of  the  rise  and  fall  of  the  price  of  exchange. 

In  the  case  of   bills  on  England,  par  of   exchange  is 


Movements  of  Money  between  Countries.          327 

$4.86  §  =  £1.  Now  brokers  can  profitably  send  gold  to 
England  and  sell  bills  against  it  at  the  rate  of  about 
$4.891  for  the  pound.  This  is  therefore  the  upper  limit 
of  the  premium  they  can  charge  for  "  sight "  bills.  Ex- 
change is  then  said  to  be  at  the  "shipping  point."  In 
this  situation,  the  exporter  is  able  to  get  a  premium 
(about  $4.88  for  £1)  when  he  sells  his  bill  to  the  brokers. 
(Of  course  bills  that  are  not  payable  at  sight  are  always 
lower  than  "sight"  bills.) 

There  is  a  corresponding  lower  limit  of  the  rate  for 
"sight"  bills,  which  depends  on  the  cost  of  bringing  over 
actual  money.  Brokers  can  make  a  fair  profit  by  buying 
bills  at  $4. §3  for  £1,  even  if  the  only  use  they  can  find 
for  the  proceeds  is  to  have  the  money  brought  to  Amer- 
ica. This,  therefore,  is  the  gold-importing  point,  or  lower 
limit  of  the  rate  of  exchange  on  England. 

It  is  to  be  remembered  that  gold  passes  from  country 
to  country  simply  by  weight,  even  although  it  be  in 
the  form  of  coins.  When  we  say  that  $4.86  f  equals  the 
English  pound,  the  meaning  is  that  this  is  the  relative 
weight  of  pure  gold  in  the  dollar  and  the  sovereign.  In- 
cidentally, it  is  worth  noting  that  bankers  do  not  always 
send  to  the  mint  the  foreign  coins  they  import.  It  may 
be  an  advantage  presently  to  have  gold  in  the  form 
of  foreign  coin  for  sending  back,  when  the  balance  of 
exchange  turns  the  other  way. 

To  be  accurate,  the  balance  of  imports  and  exports  is 
only  the  chief  and  usual  occasion  for  the  movement  of 
money  between  countries.  Every  other  business  relation 


328  Political  Economy. 

of  each  country  to  other  countries  must  come  into  the 
account  and  help  to  determine  the  rate  of  exchange. 
For  example,  if  foreign  capitalists  invest  in  our  railroads 
or  buy  our  government  bonds,  we  may  have  a  balance  of 
imports  over  exports  equal  to  the  sum  they  invest,  with- 
out causing  gold  to  be  sent  abroad.  On  the  other  hand, 
if  we  have  to  pay  ten  millions  annually  as  interest 
to  foreign  holders  of  our  bonds,  and  ten  millions  more 
for  the  expenses  of  Americans  travelling  in  Europe,  our 
exports  may  exceed  our  imports  by  twenty  millions 
without  causing  gold  to  come  to  us. 

3.  How  Exports  and  Imports  are  kept  roughly  equal. — 
A  country  cannot  go  on  permanently  getting  from  other 
countries  more  than  she  gives  them  in  return.  When 
her  debts  to  foreign  nations  exceed  her  claims  against 
them,  gold  has  to  be  sent  to  settle  the  balance.  The 
effect  of  a  continued  export  of  gold  is  to  lessen  gradually 
her  home-supply  of  money,  and  thus  cause  a  decline  in 
the  prices  of  her  products.  Not  only  so,  but  the  increased 
supply  of  money  in  the  countries  to  which  the  gold  is 
sent  causes  a  rise  in  the  prices  of  the  things  she  buys 
of  those  countries.  This  double  change  of  prices  tends  in 
two  ways  to  bring  about  an  equality  of  exports  and  im- 
ports, and  thus  put  an  end  to  the  outflow  of  gold.  First, 
it  becomes  easier  than  it  was  before  to  make  a  profit  by 
sending  things  abroad  to  be  sold.  Secondly,  it  becomes 
harder  than  it  was  before  to  find  a  profitable  sale  for  im- 
ports. In  this  way  exports  are  stimulated  and  imports 
are  checked,  until  equilibrium  is  reached. 


Exports  and  Imports  tend  to  Equality.          329 

It  is  thus  made  certain  that  a  drain  of  money  from 
one  country  to  another  cannot  go  on  permanently ;  that 
a  country  must  in  the  long  run  give  commodities  for 
commodities.  A  case  may  easily  be  imagined  in  which 
one  country  should  have  all  her  prices  above  those  of 
another,  to  such  an  extent  that  a  one-sided  trade  should 
set  in  between  them,  —  the  country  of  high  prices  send- 
ing the  other  nothing  but  money  in  return  for  imports. 
But  such  a  trade  could  not  last.  The  transfer  of  money 
would  soon  cause  a  fall  of  prices  in  the  one,  and  a  rise  of 
prices  in  the  other,  until  the  difference  became  too  slight 
to  afford  a  profit  for  the  movement  of  goods.  Then  the 
trade  would  cease,  —  that  is,  if  the  change  of  prices  failed 
to  open  a  chance  for  sending  goods,  with  a  profit,  where 
cash  was  sent  previously.  The  thing  certain  to  happen 
is  the  cessation  of  the  outflow  of  money. 

A  country  cannot  long  have  imports  without  export- 
ing an  equivalent.  So  neither  can  it  have  exports  with- 
out importing  an  equivalent.  The  money  of  the  world 
could  not  always  move  towards  one  country  without  in 
the  end  stripping  other  countries  of  their  necessary 
share. 

The  principles  here  stated  must  be  slightly  modified 
for  the  case  of  the  gold-producing  countries.  Most  of 
the  world's  supply  of  gold  is  produced  in  two  or  three 
countries.  The  new  gold  must  find  its  way  out  of  these 
and  distribute  itself  over  the  commercial  world.  It  can 
do  so  only  through  the  ordinary  process,  by  going  out  in 
payment  of  balances  accruing  against  these  countries  on 


330  Political  Economy. 

their  general  trade  with  the  rest  of  the  world.  Though 
gold  is,  for  the  gold-producing  countries,  a  commodity 
and  a  part  of  its  product  of  industry,  yet  it  is  an  article 
which  cannot  have  a  lower  price  in  one  country  than  in 
another,  for  gold  has  no  price.  The  excess  of  gold  in  the 
countries  producing  it  keeps  their  general  level  of  prices 
above  the  level  prevailing  in  other  countries :  with  the 
result  that  their  importation  of  ordinary  commodities  is 
steadily  greater  than  their  exportation.  This  causes  the 
demand  for  bills  on  other  countries  to  be  greater  than 
the  supply ;  exchange  is  ordinarily  at  or  near  the  ship- 
ping point.  The  brokers  have  to  send  gold,  from  time 
to  time,  to  cover  the  bills  they  sell  in  excess  of  those 
they  buy.  In  this  way  the  gold  makes  its  way  to  other 
countries. 

4.  Prices  of  the  Goods  Exchanged  must  Differ  in  the 
Trading  Countries.  —  It  may  be  taken  for  granted  that 
no  man  would  ordinarily  send  an  article  to  another  coun- 
try to  be  sold,  unless  he  expected  to  get  a  higher  price 
for  it  than  he  could  get  at  home :  enough  higher  to  pay 
the  freight,  insurance,  and  other  costs,  together  with  some 
balance  over  by  way  of  profit  on  the  transaction.  Cer 
tainly  no  man  would  make  a  business  of  buying  products 
in  one  country  and  selling  them  in  another,  unless  the 
difference  of  price  in  the  two  countries  was  sufficient  to 
give  him  ordinary  profits  on  the  business. 

Also,  we  may  assume  that  the  difference  in  price  in 
the  two  countries  cannot  ordinarily  be  more  than  enough 
to  cover  all  costs  and  charges,  and  leave  ordinary  profits 


Basis  of  Trade  between   Countries.  331 

for  those  who  carry  on  the  business.  The  competition 
of  other  capitalists  may  be  relied  on  to  keep  the  profits  of 
this  class  of  traders  on  a  level  with  those  made  in  other 
business. 

The  smaller  the  value  of  an  article,  in  proportion  to  its 
weight  and  bulk,  the  greater  must  be  the  difference  in 
its  price  in  the  two  countries  in  order  to  make  a  trade 
in  it  profitable :  for  the  cost  of  transporting  such  articles 
is  great  in  proportion  to  their  value.  Thus,  the  price  of 
coal  in  Massachusetts  must  differ  more  from  the  price 
of  coal  in  Pennsylvania  than  the  price  of  shoes  differs 
in  the  two  States  The  price  of  lumber  in  the  United 
States  and  in  France  must  differ  more  widely  than  (apart 
from  Customs'  duties)  the  price  of  silk  differs  in  the  two 
countries 

5.  Trade  between  Communities  Due  to  Difference  in 
Relative  Cost  —  From  the  fact  that  the  prices  ot  the 
articles  exchanged  differ  in  this  way  in  the  trading  coun- 
tries, we  can  infer  a  principle  of  fundamental  importance 
in  relation  to  trade  between  separate  communities.  This 
principle  is,  that  no  exchange  of  commodities  can  exist 
between  two  countries  except  there  be  a  difference  in 
the  comparative  cost  to  employers  of  producing  the  com- 
modities in  the  two  countries  If  we  construct  a  scale 
of  prices  for  each  country,  and  compare  the  one  scale 
with  the  other,  the  point  will  at  once  stand  forth  clearly. 
Suppose  wheat  to  be  ordinarily  exported  from  this  coun- 
try to  Sweden,  and  iron  to  be  regularly  imported  from 
Sweden.  Suppose  farther,  thntthj  i\inrririn  price  of 


332  Political  Economy. 

wheat  is  ninety  cents  a  bushel,  and  that  fifteen  pents 
additional  must  be  obtained  in  Sweden  in  order  to  give 
the  exporter  a  profit  over  expenses.  Also,  that  the  price 
of  a  hundred- weight  of  iron  in  Sweden  is  SI. 00,  and  that 
the  importer  must  have  twenty  cents  additional  for 
bringing  it  to  the  United  States.  Putting  these  facts 
in  the  form  of  a  diagram,  we  readily  see  that  the  ratio 

United  States.  Sweden. 

$1.20  $1.20 

1.15  ^>~,       r  1.15 

1.10  <:?^C  1.10 

1.05  -^_      ,.-1.05 

1.00  --1.00 

.95           ^---VH^'  .95 

.90""  .90 

of  the  price  of  wheat  to  the  price  of  iron  is  different  in 
the  two  countries.  In  the  United  States  it  is  90:120; 
in  Sweden  it  is  105  :  100,  (or  90 : 86).  .This  tells  us 
unmistakably  that  the  comparative  cost  to  employers 
of  producing  wheat  and  iron  in  the  United  States  is 
different  from  the  comparative  cost  of  producing  them 
in  Sweden.  For  if  it  were  not,  this  difference  in  the 
ratios  of  the  prices  could  not  last;  American  employers 
would  produce  iron  in  preference  to  wheat;  Swedish 
employers  would  find  wheat-raising  more  profitable  than 
the  production  of  iron  So  the  ratio  of  prices  would  be 
changed  and  the  trade  would  cease. 

It  is  thus  easily  demonstrable  that  where  a  regular 
trade  exists  between   two  countries  there  must  be,  for 


A  Measure  of  Comparative  Cost.  333 

the  time  being,  a  difference  in  comparative  cost  at  least 
equal  to  the  cost  of  transporting  the  goods  exchanged. 
How  the  difference  arises,  whether  or  not  it  is  necessa- 
rily permanent,  and  whether  it  is  expedient  in  any  case 
to  impose  countervailing  duties  to  check  the  trade,  aie 
questions  not  now  under  consideration.  We  are  here 
concerned  only  with  discovering  the  present  facts  which 
an  existing  trade  implies.  Whatever  views  we  may  hold 
as  to  the  expediency  of  protective  duties,  we  are  in  duty 
bound,  as  students,  to  search  out  the  facts  which  give 
rise  to  the  tendency  to  trade  between  countries. 

6.  How  the  Difference  in  Comparative  Cost  might  be 
Ascertained.  —  How  great  the  whole  difference  in  com- 
parative cost  may  be,  in  any  case,  cannot  be  inferred 
from  the  prices  at  which  the  trade  goes  on.  We  can 
only  be  sure  that  it  is  at  least  somewhat  greater  than 
the  difference  between  the  ratios  of  the  prices.  In 
order  to  discover  how  much  greater  it  is  than  this,  the 
trade  would  have  to  be  stopped.  For  the  price  of  wheat 
in  Sweden  is  kept  down  by  the  cheap  supplies  from 
the  United  States ;  and  the  price  of  iron  in  the  United 
States  is  kept  down  by  the  cheap  importation  from 
Sweden. 

If  two  countries  wished  to  discover  the  extent  of  the 
difference  between  their  ratios  of  cost  to  cost  in  the  case 
of  the  articles  exchanged,  they  might  obviously  do  so 
by  means  of  import  duties.  By  imposing  duties,  and 
raising  them  year  by  year  until  they  reached  a  height 
just  sufficient  to  prevent  the  trade^  they  could  find  in  the 


334  Political  Economy. 

new  ratio  of  prices,  in  each  country,  a  pretty  accurate 
measure  of  the  difference  in  comparative  cost.1 

Let  us  suppose  that,  in  our  example,  it  were  found  that 
with  a  duty  of  thirty  cents  a  hundred-weight  on  iron, 
and  fifteen  cents  a  bushel  on  wheat,  some  trade  would  go 
on  permanently,  but  that  at  any  higher  rates  the  trade 
must  cease.  Wheat  must  then  stand  at  $1.20  a  bushel 
in  Sweden,  and  iron  at  $1.50  a  hundred-weight  in  the 
United  States ;  these  being  the  prices  necessary  to  give 
the  traders  a  profit  on  the  business,  after  paying  the 
additional  charges.  The  ratio  of  the  price  of  wheat  to 
that  of  iron  in  the  United  States  would  then  be  90: 150, 
and  in  Sweden  it  would  be  120  :  100  (or  90  :  75). 

On  the  supposition  that  these  prices  continued,  they 
might  safely  be  taken  to  show  the  comparative  cost  of 
production  of  wheat  and  iron  in  each  country.  For, 
if  American  employers  found  the  production  of  iron  at 
$1.50  a  hundred- weight  more  profitable  than  the  produc- 
tion of  wheat  at  ninety  cents  a  bushel,  they  would  grad- 
ually desert  the  production  of  wheat  altogether.  And 
so  of  the  production  of  wheat  in  Sweden  ;  if  Swedish 
employers  found  it  more  profitable  to  raise  wheat  at 
$1.20  a  bushel,  than  to  produce  iron  at  $1.00  a  hundred- 
weight, they  would  gradually  desert  the  production  of 

1  Strictly,  it  would  not  matter  whether  the  barrier  to  the  exchange 
were  duties  imposed  by  both  countries  or  a  sufficiently  high  duty  im 
posed  by  one  of  the  two.  The  former  alternative  is  suggested  because 
it  works  out  more  simply,  —  the  trade  being  checked  equally  on  each 
side.  If  the  check  came  from  one  side  only,  there  would  be  a  transft  r 
of  money  and  a  re-adjustment  of  prices  in  each  country. 


Differences  in  Comparative   Cost.  335 

iron.  If  the  production  of  wheat  goes  on  in  the  United 
States,  and  of  iron  in  Sweden,  on  these  terms,  it  must  be 
because  the  ratio  of  cost  to  cost  in  Sweden  differs  from 
that  in  the  United  States  to  the  same  extent  as  the  ratios 
of  the  prices  differ.  That  is  to  say,  in  Sweden  seventy- 
five  bushels  of  wheat  cost  employers  as  much  as  ninety 
hundred- weight  of  iron  (75  x  $1.20  =  90  x  $1.00);  whereas, 
in  the  United  States,  one  hundred  and  fifty  bushels  of 
wheat  are  produced  at  the  same  cost  as  ninety  hundred- 
weight of  iron  (150  x  $0.90  =  90  x  $1.50).  Or,  changing 
the  form  of  statement,  Sweden's  ratio  is  1  bu.  —  1J  cwt., 
whereas  ours  is  1  bu.  =  jj  cwt. 

7.  Difference  in  Comparative  Cost  a  Basis  for  Trade  in 
all  Cases.  —  These  figures  tell  us  nothing  as  to  the  source 
of  the  difference  in  comparative  cost ;  nor  does  it  matter 
in  the  least,  as  regards  the  course  of  the  trade,  how  the 
difference  arises.  It  may  be  wholly  due  to  inferiority  on 
Sweden's  part  as  a  producer  of  wheat,  or  wholly  to  supe- 
riority on  her  part  as  a  producer  of  iron,  or  partly  due  to 
each  of  these  causes.  Or  it  may  be  that  both  wheat  and 
iron  can  be  produced  with  less  labor  in  the  United  States 
than  in  Sweden,  our  advantage  being  greater  in  the  pro- 
duction of  wheat  than  in  the  production  of  iron.  As  to 
these  points  our  figures  give  no  information  ;  they  merely 
make  it  clear  that  where  trade  exists,  a  difference  in 
comparative  costs  must  exist  as  the  basis  of  it. 

It  may  seem  strange,  at  first  blush,  that  a  commodity 
could  ever  be  regularly  exported  with  a  profit  to  a  coun- 
try in  which  it  can  be  produced  with  less  labor  than  in 


336  Political  Economy. 

the  exporting  country.  But  all  that  is  necessary  to  bring 
this  about  is  a  difference  in  the  comparative  cost  to 
employers  of  producing  any  two  commodities  in  the  two 
countries.  The  explanation  of  the  seeming  puzzle  is,  that 
the  money  cost  of  a  commodity  may  be  less  in  one  coun- 
try than  in  another,  while  the  true  or  economic  cost  is 
greater.  Though  it  costs  employers  less  money  to  get  a 
hundred-weight  of  iron  produced  in  Sweden  than  it  does 
in  the  United  States,  the  quantity  of  labor  required  may 
be  indefinitely  greater  in  Sweden  than  here.  Money- 
wages  and  the  prices  of  materials  may  be  lower  there 
than  here,  because  the  value  of  money  may  be  higher 
there  than  here.  This  result  would  obviously  come 
about,  if  Sweden  should  buy  freely  of  our  wheat,  with- 
out having  any  product  of  her  own  cheap  enough  in 
price  to  be  profitably  exported  to  us.  Her  money  sup- 
ply would  be  gradually  drawn  away  ;  her  general  scale 
of  prices  and  her  money-wages  would  decline.  If  her 
inferiority  to  the  United  States  be  less  in  iron  than  in 
other  things,  it  is  clear  that  iron  would  be  the  first 
thing  to  be  made  low  enough  in  price  to  be  sent  to  us 
with  a  profit  for  the  sender. 

If  any  person  be  disposed  to  doubt  whether  trade  be- 
tween countries  rests  on,  and  implies,  a  difference  in  the 
ratios  of  costs,  he  will  find  it  instructive  to  consider  the 
case  of  two  countries  differing  strongly  in  advantages 
for  production,  but  differing  equally  in  all  commodities. 
In  such  a  case,  the  ratio  of  cost  to  cost  would  be  the 
same  in  both  countries,  and  there  would  be  no  basis  for 


Disparity  of  Resources  no  Basis  for  Trade.      337 

a  permanent  trade.  It  might  happen  that,  for  some 
cause,  prices  in  one  should  be  enough  higher  than  prices 
in  the  other  to  cause  a  movement  of  goods  for  a  time. 
But  gradually  the  return  movement  of  money  would 
bring  prices  towards  a  common  level ;  one  after  another, 
according  to  costliness  of  transportation,  commodities 
would  cease  to  be  exportable,  until  finally,  even  those 
having  greatest  value  in  the  least  bulk,  would  come  to 
be  so  nearly  equal  in  price  in  both  countries  that  no 
profit  could  be  made  by  sending  them.  Then  all  trade 
would  cease.  This  would  come  to  pass,  even  if  the  one 
could  produce  every  commodity  with  half  of  the  labor 
required  to  produce  it  in  the  other.  An  equal  advantage 
in  all  things  has  no  tendency  to  cause  an  exchange  of 
products.  Its  only  tendency  is  to  cause  men  to  emigrate 
from  the  country  of  poor  resources  to  the  country  of  rich 
resources.  This  is  the  only  way  by  which  people  living 
in  a  country  of  poor  resources  can  get  any  permanent 
benefit  from  a  country  superior  to  their  own  in  all  points, 
and  equally  superior  in  all. 

8.  International  Values.  —  When  a  trade  exists  between 
two  separate  communities,  what  determines  how  much 
the  product  of  the  one  shall  be  worth  as  compared  with 
that  of  the  other  ?  What  determines  the  amount  of  iron 
we  shall  get  from  Sweden  in  exchange  for  each  bushel 
of  wheat  ?  Of  course  this  depends,  at  any  given  time,  on 
the  price  of  each.  But  prices,  as  we  know,  may  change. 
If  wheat  rises  in  price,  or  iron  falls,  we  get  more  iron 
than  before  for  every  bushel  of  wheat.  What  deter- 


338  Political  Economy. 

mines  the  relative  prices  of  the  two  articles,  as  a  perma- 
nent rule  ? 

In  the  first  place,  we  easily  see  that  there  is  nothing 
in  this  sort  of  exchanging  to  make  the  value  of  each 
product  correspond  to  the  quantity  of  labor  and  waiting 
required  to  produce  it.  Value  tends  to  conform  to  cost 
of  production  only  where  there  is  freedom  of  competition 
between  the  producers.  It  is  not  open  to  the  young 
laborers  to  choose  freely  between  the  exchanging  indus- 
tries :  to  choose,  for  example,  between  raising  wheat  in 
the  United  States  and  producing  iron  in  Sweden.  We 
have  nothing,  therefore,  in  this  kind  of  exchanging,  to 
keep  the  values  under  the  control  of  cost  of  production. 

The  comparative  costs  of  production  do,  however,  set 
limits  within  which  the  values  must  ordinarily  stand. 
If,  in  our  supposed  trade  with  Sweden,  the  ratio  of  cost 
to  cost  in  each  country  be  as  given  in  §  6,  it  is  obvious 
that  the  price  of  our  wheat  to  Sweden  cannot  exceed  the 
price  she  gets  for  one  and  one-fifth  hundred-weight  of 
iron ;"  nor  can  we  take  less  than  the  price  to  us  of  three- 
fifths  of  a  hundred-weight  of  her  iron.  At  a  price  out- 
side of  these  limits  either  way,  one  country  or  the  other 
would  give  up  the  trade ;  for  her  employers  could  more 
profitably  produce  the  desired  article  at  home,  than  the 
export  to  be  sold  in  exchange  for  it. 

Within  the  limits  thus  set  by  the  comparative  costs, 
the  terms  of  the  exchange  are  fixed  by  the  relative 
demand  of  each  country  for  the  other's  product.  If 
Sweden  has  a  strong  demand  for  our  wheat  as  compared 


Law  of  International  Values.  339 

with  our  demand  for  her  iron,  this  will  cause  the  prices 
to  approach  her  own  home  ratio  of  costs ;  our  prices  will 
rise  and  hers  will  fall  until  the  price  of  a  bushel  of 
wheat  is  near  to  the  price  of  one  and  one-fifth  hundred- 
weight of  iron.  If,  on  the  other  hand,  our  demand  for 
her  iron  be  relatively  greater  than  her  demand  for  our 
wheat,  the  prices  will  approach  our  home  ratio  of  costs ; 
the  price  of  a  bushel  of  our  wheat  will  be  near  to  the 
price  of  three-fifths  of  a  hundred- weight  of  "her  iron. 

9.  Values  Changed  by  Movement  of  Money.  —  This  prin- 
ciple works  itself  out  in  practice  through  the  movements 
of  money  in  payment  of  international  balances.  It  may 
therefore  take  many  years  to  accomplish  its  result ;  but 
the  result  is,  in  the  end,  inevitable.  It  works  slowly 
because  it  has  to  change  not  merely  the  prices  of  the 
articles  traded  in,  but  the  whole  scale  of  prices  and  of 
money-wages  in  the  trading  countries. 

•By  way  of  illustration,  let  us  suppose  the  trade  with 
Sweden  to  open  with  the  prices  assumed  in  §  5 ;  namely, 
wheat  ninety  cents,  and  iron  $1.00.  If,  at  these  prices, 
Sweden  buys  one  hundred  bushels  of  our  wheat  for  every 
ninety  hundred- weight  of  iron  we  import  from  her,  then 
the  trade  may  go  on  indefinitely  on  this  basis.  If,  how- 
ever, her  demand  for  wheat  be  greater  than  our  demand 
for  iron;  if,  for  example,  she  buys  a  million  bushels  a 
year  in  excess  of  the  quantity  our  import  of  her  iron 
pays  for,  then  for  this  excess  she  must  send  f  us  money 
year  by  year.  The  effect  will  be  a  gradual  decline  in  the 
prices  of  her  products,  —  the  price  of  iron  with  the  rest ; 


340  Political  Economy. 


and  a  gradual  rise  in  our  prices,  —  the  price  of  wheat 
with  the  Test. 

This  double  movement  will  go  on  until  the  high  price 
of  our  wheat  cuts  off  a  part  of  her  demand  for  it,  and 
the  low  price  of  her  iron  causes  us  to  buy  greater  quanti- 
ties of  it.  In  this  way  the  trade  will  reach  an  equilib- 
rium and  the  movement  of  money  will  cease.  Suppose 
that  when  this  point  is  reached,  her  iron  has  fallen  to 
ninety-five  cents  a  hundred-weight,  and  our  wheat  has 
risen  to  ninety-five  cents  a  bushel.  It  is  very  obvious 
that,  in  the  new  situation,  Sweden  gets  less  wheat  for 
a  hundred-weight  of  her  iron  than  she  did  at  the  start. 
Her  strong  demand  for  our  product  has  altered  the  terms 
of  the  exchange  to  her  disadvantage,  bringing  the  values 
nearer  to  her  own  ratio  of  costs,  namely,  1  bu.  =  1-|  cwt. 

If,  at  the  original  prices,  our  demand  had  been  the 
stronger,  the  whole  movement  would  have  been  reversed ; 
our  prices  would  have  fallen  and  Sweden's  prices  would 
have  risen  until  the  trade  reached  equilibrium.  In  the 
outcome,  a  bushel  of  our  wheat  would  pay  for  less  of 
Sweden's  iron  than  it  did  at  the  outset.  The  values 
are  brought  nearer  to  our  own  ratio  of  costs,  namely, 
1  bu.  =  §  cwt. 

10,  How  these  Principles  Apply  in  Actual  Trade  —We 
have  thus  far,  for  the  sake  of  clearness,  confined  our 
view  to  the  simplest  possible  case  of  exchange  between 
separate  countries.  Of  course,  in  practice,  the  trade 
between  different  parts  of  the  world  is  infinitely  com- 
plex. Each  country  trades  with  many  others,  exporting 


How  Principles  Apply  in  Actual  Trade.          341 

and  importing  a  great  variety  of  commodities.  But  the 
principle  governing  all  exchanges  must  be  the  same. 
Every  country  exports  those  things,  and  those  only,  that 
have  in  some  other  country  a  price  enough  higher  than 
her  own  to  make  the  exportation  a  source  of  gain  to 
those  who  carry  it  on.  Each  country  imports  only  those 
things  that  have  in  some  other  country  a  price  so  much 
below  her  own  that  the  importer  can  make  a  profit.  And 
these  differences  of  price  can  exist  permanently  only 
as  a  result  of  differences  in  the  comparative  cost  to 
employers  of  producing  things  in  different  countries. 

To  the  trade  of  each  country  it  is  as  if  all  other  coun- 
tries were  one.  Her  exports  go  wherever  the  price  is 
highest,  and  her  imports  in  return  come  from  wherever 
their  price  is  lowest.  Our  wheat  may  go  to  England 
and  we  may  get  the  iron  in  return  from  Sweden,  — 
simply  turning  over  to  the  latter  country  our  claim  on 
England.  That  would  of  course  leave  England  indebted 
to  Sweden;  but  with  that  we  should  have  no  concern. 
Our  necessity  is  confined  to  giving  other  countries  as 
a  whole  as  much  as  we  get  of  them. 

Trade  goes  on,  at  any  given  time,  on  the  basis  of  the 
existing  prices.  If  these  prices  cause  any  country  to 
import  more  than  her  exports  pay  for,  her  prices  will 
be  lowered  gradually  by  an  outflow  of  her  money.  Con- 
versely, if  any  country's  exports  are  more  than  sufficient 
to  discharge  her  liabilities  to  all  other  countries,  her 
general  scale  of  prices  will  be  raised  by  an  inflow  of 
money  from  other  countries.  In  this  way,  the  foreign 


342  Political  Economy. 


trade  of  each  country  is  brought  to  an  equilibrium  after 
every  disturbance  of  the  balance. 

A  general  fall  in  the  prices  of  things  produced  in  any 
country  may  increase  its  exports  in  two  distinct  ways. 
It  may  cause  other  countries  to  buy  more  of  the  articles 
they  bought  previously.  Secondly,  it  may  make  it  pos- 
sible to  export,  with  a  profit,  articles  that  were  not 
previously  exportable,  because  there  was  not  difference 
enough  between  the  home  price  and  the  foreign  price. 
There  are  usually  some  articles  that  are  on  the  verge 
of  exportability,  and  a  small  decline  of  prices  may  thus 
be  sufficient  to  increase  considerably  the  volume  of  a 
country's  exports.  In  the  same  way  a  small  rise  of  the 
general  scale  of  prices  in  a  country  may  cause  increase 
of  imports,  by  introducing  new  articles  as  well  as  by 
swelling  the  importation  of  old  ones.  The  importance 
of  this  principle  lies  in  the  fact  that  it  makes  the  estab- 
lishment of  equilibrium  more  prompt  than  it  would  be 
if  the  whole  burden  came  on  a  single  commodity.  For 
example,  in  the  case  supposed  on  page  340,  the  decline  of 
Sweden's  prices  may  not  have  to  proceed  far  enough  to 
bring  iron  down  to  ninety-five  cents  a  hundred-weight. 
A  less  decline  may  open  a  way  for  the  exportation  of 
some  other  commodity  not  previously  exported,  and  this 
may  arrest  the  further  outflow  of  money. 

The  higher  a  country's  general  scale  of  prices  and 
money-wages  (that  is  to  say,  the  lower  the  value  of 
money  in  a  country),  the  more  favorably  does  she  trade 
with  other  countries.  Everything  she  exports  goes  far- 


Sources  of  Difference  in  Comparative  Cost.         343 

ther  towards  paying  for  imports  than  it  would  do  if  the 
level  of  prices  were  lower.  For  this  reaspn  a  country 
that  produces  gold  for  other  countries  has  a  standing 
advantage  in  foreign  trade.  It  gets  all  its  imports  more 
cheaply  because  cf  the  steadily  high  level  of  its  prices. 

11.  Sources  of  Difference  in  Comparative  Cost. — The  chief 
sources  of  difference  in  the  ratio  of  cost  to  cost,  in  differ- 
ent countries,  may  be  grouped  under  three  general  heads : 

(1)  Differences  in  climate,  soil,  mineral  wealth,  and 
other  natural  resources.     Each  of  the  exchanging  coun- 
tries may  have  great  natural  facilities  for  the  production 
of  some  commodities  which  the  other  could  produce  only 
with  difficulty,  or  not  at  all.     The  trade  between  tropical 
countries  and  countries  of  cooler  climate  is  largely  due 
to  this  class  of  causes. 

(2)  Differences  in  the  industrial  character  of  the  in- 
habitants of  different  countries,  in  their  degree  of  civil- 
ization, etc.    The  trade  between  a  highly  civilized  and  a 
semi-barbarous  country  may  be  due  to  this  cause.     The 
natural  resources  of  the  two  countries  may  be  similar ; 
but  the  possession  of  machinery,  and  of  skill  in  using  it, 
gives  the  civilized  country  great  comparative  advantages 
in  the  production  of  things  that  are  made  by  the  use  of 
machinery.     This  makes  a  basis  for  trade,  —  the  civilized 
country  giving  machine-made  goods  in  exchange  for  such 
things  that  have  to  be  produced  mainly  by  hand.     In  the 
same  way,  any  special  aptitude  possessed  by  the  people 
of  a  country  may  create  an  occasion  for  trade  with  other 
countries. 


344  Political  Economy. 

(3)  Differences  in  density  of  population.  .This  is  a 
common  source  of  trade  between  new  and  old  countries. 
Two  countries  may  be  quite  alike  in  natural  resources, 
and  in  the  industrial  quality  of  their  people ;  but  one 
may  be  an  older  country,  with  denser  population,  than 
the  other.  Of  course  the  one  with  the  denser  population 
is  the  first  to  feel  the  effects  of  diminishing  returns. 
When  its  own  home  resources  of  any  kind,  worked  at 
their  point  of  maximum  return,  become  insufficient  for 
the  needs  of  its  people,  the  products  affected  rise  in 
price.  When  the  rise  becomes  sufficient  to  cover  cost 
of  transportation,  these  products  begin  to  be  imported 
from  the  other  country,  where  increase  of  the  production 
is  still  possible  without  increase  of  cost. 

At  first,  there  may  be  no  commodity  low  enough  in 
price  in  the  older  country  to  make  a  return  trade  pos- 
sible. If  not,  an  outward  flow  of  money  ensues,  and 
prices  fall  until  a  return  trade  is  developed,  in  commod- 
ities not  affected  by  diminishing  returns.  Since  manu- 
facturing is  practically  free  from  the  law  of  diminishing 
returns,  it  is  inevitable  that  the  exports  of  the  older 
country  should  consist  of  manufactured  articles. 

So  long  as  the  increasing  demand  of  the  older  country 
can  be  supplied  by  the  new  country,  without  increase 
of  cost,  the  trade  will  proceed  on  this  basis,  growing  in 
volume  as  years  go  by.  When,  at  length,  the  effects  of 
diminishing  returns  begin  to  be  felt  in  the  new  country 
also,  in  the  production  of  the  commodity  it  supplies  to 
the  other,  the  price  will  begin  to  rise  in  both  countries. 


Differences  in  Wages  not  a  Cause  of  Trade.       345 

The  more  populous  country  will  continue  to  import  the 
article  from  the  other,  but  the  increase  of  supply  needed 
by  her  from  year  to  year,  will  now  be  partly  or  wholly 
produced  at  home. 

This  principle  explains  why  it  is  that  countries  so 
commonly  produce  a  part  of  the  necessary  supply  of  an 
article  at  home,  and  procure  the  balance  by  foreign  trade. 
It  also  indicates  the  natural  limits  of  trade  between  new 
and  old  countries. 

12.  Differences  in  Wages  not  a  Cause  of  Trade - 
It  evidently  follows,  from  the  nature  of  the  case,  that 
differences  in  the  general  level  of  wages,  comparing 
country  with  country,  make  no  basis  for  exchange  of 
products.  A  high  or  a  low  level  of  wages  in  a  country 
affects  all  products  alike.  For  example,  the  high  level 
of  wages  in  this  country  extends  to  the  production  of 
wheat  and  beef,  as  well  as  to  the  production  of  cloth 
and  steel  rails.  If  that  were  the  only  difference  between 
this  country  and,  say  England,  it  could  not  make  cloth 
and  steel  rails  dearer  here  than  in  England,  and  at  the 
same  time  make  wheat  and  beef  cheaper  here  than  there 
Nor  can  the  lower  level  of  wages  prevailing  in  England 
be  the  fundamental  cause  of  the  lower  price  of  her  cloth 
and  steel  rails ;  because  it  does  not  make  her  wheat  and 
beef  low  in  price  also.  A  circumstance  that  is  common 
to  all  the  industries  of  each  country,  could  not  bring 
about  that  difference  in  the  ratio  of  price  to  price  in  the 
two  countries,  which  alone,  as  we  have  seen,  makes  ex- 
change of  products  possible. 


346  Political  Economy. 


Kemembering,  however,  that  English  cloth  is  brought 
over  here  to  be  sold  only  when  the  price  is  lower  there 
than  here,  it  may  seem  that  a  rise  of  money-wages  in 
England,  might  so  raise  the  money  cost  of  her  cloth 
as  to  stop  the  exportation  of  it  to  us.  This  may  be 
granted,  if  the  meaning  be  that  an  increased  supply  of 
money  in  Great  Britain,  might  raise  her  prices  to  such 
an  extent  as  to  check  greatly,  or  even  stop  entirely, 
her  export  trade.  But  in  order  to  judge  of  the  result  we 
must  look  at  the  whole  case :  we  must  not  forget  the 
effect  of  the  higher  prices  on  her  import  trade.  The 
outflow  of  money  that  would  arise  to  pay  for  imports, 
would  presently  bring  about  a  fall  of  her  money -wages 
and  prices,  and  her  export  of  cloth  would  be  resumed. 

If  the  rise  of  her  money-wages  be  meant  in  the 
sense  of  greater  purchasing  power,  her  supply  of  money 
being  no  greater,  but  the  laborers  getting  a  larger  pro- 
portion of  it,  then  the  answer  is  that  the  rise  would 
have  no  effect  on  prices,  and  consequently  would  have 
no  effect  on  the  international  trade.  The  only  result 
would  be  a  fall  of  the  profits  of  English  employers,  and 
the  fall  would  extend  equally  to  all  English  industries. 
The  producers  of  cloth  could  get  no  higher  price  for  it  at 
home  than  before,  and  would- consequently  have  the  same 
motive  as*  before  for  sending  it  to  us. 

Similarly  a  decline  of  money-wages  and  prices  in  the 
United  States, -caused  by  a  diminished  supply  of  money 
in  this  country,  might  temporarily  stop  the  importation  of 
goods  from  abroad;  but  increase  of  exports  would  pres- 


Internal  Trade  may  be  "International"         347 

ently  bring  us  increase  of  money  from  abroad,  and  this 
would  raise  our  prices  and  money-wages  again.  On  the 
other  hand,  a  fall  of  money  wages  due  simply  to  dimin- 
ished saving,  would  not  cause  our  prices  to  fall.  (See 
Chapter  XIII.,  §  5.)  It  would  only  raise  the  profits  of 
our  employers. 

The  true  view,  then,  would  seem  to  be  that  where  a 
basis  exists  for  exchange  of  products,  owing  to  difference 
in  the  ratios  of  cost  to  cost,  the  trade  itself  will  bring 
the  scale  of  money-wages  and  prices  in  both  countries 
into  the  proper  relation  for  carrying  on  the  exchange. 
But  this  adjustment  does  not  affect  the  level  of  real 
wages  in  either.  That  is  governed  in  every  country,  not 
by  the  absolute  height  of  its  money-wages  and  prices, 
but  by  the  relation  between  the  two. 

13.  Much  Domestic  Trade  is  "  International."  —  It  must 
not  be  supposed  that  the  foregoing  principles  apply  only 
to  trade  between  separate  nations  in  the  political  sense. 
The  word  "international"  is,  in  fact,  not  aptly  chosen 
to  designate  the  sort  of  exchanging  to  which  it  applies. 
All  trade  is  subject  to  these  principles,  if  it  takes  place 
between  communities  that  have  not  free  movement  of 
savings  and  laborers  .from  the  one  to  the  other.  Much 
of  the  domestic  trade  of  every  country,  especially  of 
every  large  country,  is  "  international "  in  the  economic 
sense.  In  our  own  case,  for  example,  the  trade  between 
north  and  south,  or  between  the  Pacific  slope  and  the 
'Atlantic  slope,  depends  on  the  same  conditions  and  fol- 
lows the  same  rule  of  values,  as  trade  between  the  United 


348  Political  Economy. 

States  and  the  United  Kingdom.  The  same  is  true  of 
the  trade  between  many  sections  of  the  country  that  are 
less  widely  separated. 

On  the  other  hand,  apart  from  the  effects  of  Customs' 
regulations,  there  is  nothing  to  distinguish  the  border 
trade  of  two  neighboring  countries  from  the  local  domes- 
tic trade  of  one  and  the  same  country.  On  the  supposi- 
tion that  the  laborers  on  each  side  of  the  boundary  line 
pass  freely  from  the  one  side  to  the  other  in  search  of 
employment,  the  value  of  commodities  in  the  border 
trade  is  governed  by  cost  of  production.  That  is  to  say, 
it  is  not  "international"  in  the  economic  sense. 


CHAPTER    XXVI. 

FREE   TRADE    AND    PROTECTION. 

THUS  far  we  have  endeavored  only  to  get  at  the  facts 
of  trade  between  countries.  As  to  the  points  brought  out 
there  is,  I  think,  no  room  for  doubt  or  difference  of  opin- 
ion. We  must  now  touch  briefly  on  the  grounds  of  the 
great  controversy  as  to  the  benefits  of  international  trade. 
I  shall  first  endeavor  to  state  briefly  the  general  position 
or  thesis  maintained  by  each  side  in  the  controversy ; 
then  I  shall  try  to  give  a  summary  of  the  chief  argu- 
ments and  counter-arguments,  by  which  the  advocates 
of  each  theory  commonly  sustain  their  position:  — 

1.  The  Theory  of  Free  Trade.  —  The  thesis  of  the  Free- 
traders may  be  stated  as  follows : 

"Free  Trade  increases  the  productiveness  of  industry 
in  all  countries.  It  enables  the  people  of  every  country 
to  use  their  best  natural  advantages.  It  thus  allows 
things  to  be  produced  where  they  can  be  produced  most 
easily.  The  result  is  to  make  the  product  of  universal 
industry  greater  than  it  could  be,  if  the  people  of  every 
country  were  required  to  produce  all  commodities  at 
home. 

"  For  example,  if  under  Free  Trade,  New  England  were 
found  exchanging  shoes  for  potatoes  with  Nova  Scotia, 
the  mere  fact  of  the  exchange  would  be  proof  that  each 

349 


350  Political  Economy. 

country  was  getting  the  imported  article  for  less  labor 
than  it  would  cost  her  at  home.  For  the  price  of  shoes 
is  higher  in  Nova  Scotia  than  in  New  England,  and  the 
price  of  potatoes  is  higher  in  New  England  than  in  Nova 
Scotia ;  otherwise  the  trade  would  not  go  on.  The  ratio 
of  cost  to  cost  must  therefore  he  different  in  the  two 
countries :  how  widely  different  could  be  known  only  by 
discovering  how  high  duties  would  have  to  be  imposed 
in  order  to  stop  the  trade.  Suppose  the  ratio  of  cost  to 
cost  in  each  country  were  found  to  be :  for  New  England 
1  pair  of  shoes  —  2  barrels  of  potatoes,  and  for  Nova 
Scotia  1  pair  of  shoes  =  3  barrels  of  potatoes.  Suppose 
further  that  there  are  one  thousand  men  in  New  England 
whose  labor  is  to  be  used  in  procuring  potatoes,  and 
another  one  thousand  in  Nova  Scotia  whose  labor  is  to 
be  used  in  procuring  shoes.  The  New-England  laborers 
can  produce  125,000  pairs  of  shoes  in  the  same  time  they 
would  require  to  produce  250,000  barrels  of  potatoes. 
The  Nova-Scotia  laborers  can  produce  300,000  barrels  of 
potatoes  in  the  same  time  they  would  require  to  produce 
100,000  pairs  of  shoes.  If  the  New-England  men  pro- 
duce potatoes  and  the  Nova -Scotia  men  produce  shoes, 
the  product  for  the  two  countries  is  250,000  barrels  of 
potatoes  and  100,000  pairs  of  shoes.  If,  on  the  other 
hand,  the  New -England  men  produce  shoes  for  Nova 
Scotia  and  the  Nova  Scotians  produce  potatoes  for  New 
England,  the  result  is  125,000  pairs  of  shoes  and  300,000 
barrels  of  potatoes.  The  difference  in  favor  of  Free  Trade 
(subject  to  some  deduction  for  cost  of  transportation)  is 
25,000  pairs  of  shoes  and  50,000  barrels  of  potatoes. 

"This  superior  productiveness  of  industry  in  both  coun- 
tries, under  free  exchange,  goes  to  swell  the  rewards  of 
producers.  If  all  countries  that  have  set  up  barriers 


Free  Trade  and  Protection.  351 

against  free  exchange  should  throw  them  down,  the  effect 
would  be  like  that  of  an  immense  improvement  in  pro- 
duction. Wages  and  profits  would  be  higher  in  all  of 
them  than  before,  because  the  product  of  industry  would 
be  greatly  increased." 

2.  The  Protectionist  Position.  —  The  general  position 
taken  by  the  advocates  of  Protection  may  be  stated  as 
follows : 

"  Every  country  ought  to  develop  her  resources  of  all 
kinds  in  a  healthy  and  symmetrical  proportion.  The 
tendency  of  unrestricted  trade  with  other  countries  is  to 
create  a  lop-sided  development.  Certain  lines  of  produc- 
tion, once  entered  upon,  are  liable  to  be  followed  to  the 
exclusion  of  everything  else.  By  the  mere  fact  that  they 
are  established,  that  the  requisite  machinery,  implements, 
skill,  and  business  arrangements  are  at  hand  for  carrying 
them  on,  they  tend  to  absorb  the  whole  energy  of  the 
people. 

"The  result  is  injurious  in  every  way.  It  condemns 
a  people  to  lasting  poverty,  because  it  leads  to  the  neg- 
lect of  the  national  resources.  The  single  product  which 
receives  all  attention  is  produced  in  too  great  quantity, 
and  commands  but  a  small  price  in  the  foreign  markets 
to  which  it  has  to  be  sent.  Much  of  even  this  small 
price  is  eaten  up  in  the  costs  of  transportation  and  the 
charges  of  middlemen,  so  that  the  producers  receive  less 
and  less  for  their  labor.  Yet  there  is  no  avenue  of  escape 
for  them.  The  products  of  foreign  labor,  coming  in  with- 
out restriction,  are  sold  at  such  low  prices  as  to  make 
hopeless  any  attempt  to  compete  with  them  in  producing 
like  articles  at  home.  The  foreign  producers  have  all 
the  advantages  of  an  established  industry.  They  have  the 


352  Political  Economy. 


machinery,  the  skilled  laborers,  and  possession  of  the  mar- 
ket. They  stand  ready  to  crush  any  attempt  at  setting 
up  a  rival  industry  here.  Eather  than  lose  control,  they 
would  place  their  goods  here  at  prices  which  would  be 
simply  ruinous  to  the  home  producer,  struggling  with 
the  difficulties  of  starting  a  new  industry. 

"Protection,  on  the  other  hand,  guarantees  to  the 
founder  of  a  new  industry  a  safe  and  remunerative  sale 
for  his  product.  He  is  enabled  to  pass,  without  ruinous 
loss,  through  the  early  stages  while  he  and  his  workmen 
are  acquiring  the  necessary  knowledge  and  skill,  and 
while  he  is  making  those  commercial  connections  which 
are  necessary  to  the  success  of  an  enterprise.  In  this 
way  a  country  builds  up  for  itself  a  variety  of  industries. 
Its  people  have  the  great  advantages  that  come  from 
diversified  pursuits.  The  growth  of  wealth  is  rapid,  be- 
cause all  the  national  resources  are  brought  into  use,  and 
every  producer  is  encouraged  by  the  prospect  of  sure 
and  adequate  returns  for  his  labor." 

GROUNDS  OF  THE  PROTECTION  THEORY. 

3.  Answer  to  the   Free   Trade  Argument  as  to  Cost.— 

Turning  now  to  the  question  of  the  effect  of  protective 
duties  on  the  cost  of  commodities,  the  advocates  of  Pro- 
tection reply  substantially  as  follows  to  the  Free  Trade 
argument: 

"Differences  in  advantages  for  different  kinds  of  pro- 
duction in  any  country  are  largely  artificial.  The  reason 
why  Nova  Scotia  can  produce  only  one  hundred  pairs  of 
shoes  with  the  labor  that  produces  one  hundred  and  fifty 
barrels  of  potatoes,  is  found  in  the  fact  that  she  has  not 
applied  herself  to  the  production  of  shoes.  If  the  impor- 


The  Argument  for  Protection.  353 

tation  of  shoes  from  New  England  were  prevented,  capi- 
tal would  be  largely  turned  into  the  shoe  industry,  the 
machinery  would  be  improved,  the  laborers  would  become 
more  efficient,  and  presently  Nova-Scotian  labor  would 
become  as  productive  in  the  manufacture  of  shoes  as  that 
of  New  England. 

"  Protection,  it  is  true,  may  temporarily  increase  the  cost 
of  commodities,  but  in  the  long  run  its  effect  is  rather  to 
cheapen  them.  It  brings  the  producer  and  the  consumer 
side  by  side,  and  thus  saves  much  needless  labor  in  trans- 
porting things  between  countries.  Though  it  excludes 
injurious  foreign  competition,  it  preserves  the  healthy 
competition  of  home  producers.  By  the  mutual  rivalry 
of  these,  each  of  them  endeavoring  to  produce  his  com- 
modity as  cheaply  as  possible,  every  known  device-,  for 
saving  labor  is  brought  into  use.  The  possession  of  a 
sure  market  enables  the  employers  to  invest  their  sav- 
ings, with  confidence,  in  machinery  and  appliances  of  all 
kinds  for  carrying  on  the  production  in  the  most  effective 
way.  The  result  is  that,  in  the  long  run,  the  productive- 
ness of  labor  is  greatly  increased  by  Protection.  Qf  this 
fact  many  notable  examples  have  occurred  in  our  o\vn 
history  under  the  present  tariff.  Nearly  all  the  ;  most 
important  commodities  are  cheaper  now  than  they  wer^ 
before  the  tariff  was  adopted." 

4.  Compensations  for  Temporary  Increase  of  Cost  under 
Protection.  —  "  It  follows  that,  even  if  there  were  no  im- 
mediate compensations,  a  protective  tariff  admits  of  easy 
defence  on  the  score  of  cost  of  commodities.  Looked  at 
merely  as  a  device  for  eventually  diminishing  Cost,  any 
temporary  sacrifice  it  calls  for  on  the  part  of  any  class 
of  consumers,  is  a  wise  and  useful  investment  of  the 
public  resources.  But  there  are  immediate  compen-sa- 


354  Political  Economy. 

tions  which,  in  themselves,  more  than  counterbalance 
the  temporary  addition  to  cost.  If,  by  the  exclusion  of 
New-England  shoes,  Nova  Scotia  must  for  a  while  pay 
more  for  her  shoes,  the  immediate  effect  is  an  extension 
of  her  own  home  industries.  The  establishment  of  shoe 
factories  increases  the  demand  for  her  labor,  and  wages 
rise.  Profits  also  rise,  because  a  new  opening  is  pre- 
sented for  the  profitable  investment  of  savings.  From 
being  a  community  wholly  given  up  to  raising  potatoes, 
she  becomes  a  community  enjoying  diversified  employ- 
ments, with  all  the  social  advantages  resulting  therefrom. 

"  On  the  side  of  New  England,  the  exclusion  of  Nova- 
Scotia  potatoes  gives  needful  encouragement  to  the  farm- 
ers. These  will  get  higher  prices  for  their  crop  when 
they  have  the  home  market  to  themselves ;  they  will 
therefore  increase  the  production,  —  will  employ  more 
laborers,  and  will  pay  higher  wages  than  they  could  if 
embarrassed  by  the  competition  of  Nova-Scotia  farmers. 
The  additional  price  the  consumers  of  potatoes  have  to 
pay  is  not  lost  as  it  would  be  if  paid  to  foreigners ;  the 
money  is  paid  to  our  own  people  and  remains  in  the  coun- 
try. The  farmers  of  New  England  will  buy  more  manu- 
factured goods  than  they  could  buy  when  they  got  less 
for  their  farm  products.  Thus,  the  money  they  receive 
will  come  back  to  those  who  have  paid  it.  Further,  the 
New-England  manufacturers  will  be  protected  as  well 
as  the  farmers ;  they  will  have  a  sure  home  market  for 
all  they  can  produce,  and  will  not  be  compelled  to  sell 
their  wares  in  competition  with  foreign  products.  This 
will  enable  them  to  employ  more  laborers,  and  to  pay 
higher  wages,  than  they  could  if  they  were  exposed  to 
foreign  competition. 

"  In  these  ways  Protection  tends  to  make  both  wages 


The  Argument  for  Protection.  355 

and  profits  high.  It  also  makes  a  nation  independent  of 
foreign  countries.  Supplying  all  her  own  needs,  she  is 
able  to  pursue  towards  other  nations  a  policy  of  becom- 
ing dignity  and  strength.  In  case  of  war,  she  is  not 
taken  at  a  disadvantage,  but  has  within  herself  all  the 
resources  for  self-support  and  vigorous  action. 

"  While  a  protective  tariff  is  thus  a  good  thing  in  itself, 
it  is  at  the  same  time  a  source  of  revenue  for  the  national 
government.  It  saves  the  people  from  the  necessity  of 
paying  taxes.  The  revenue  it  yields  comes  out  of  the 
pockets  of  the  foreign  producers ;  because  whatever  they 
send  to  us  has  to  be  sold  here,  after  paying  the  duty,  at 
the  same  price  as  the  home  product  that  pays  no  tax. 
Not  only  so  but  the  protective  tariff,  by  raising  our  prices, 
compels  the  people  of  other  countries  to  pay  us  more 
for  everything  they  buy  of  us  than  they  would  otherwise 
pay."  i 

5.  Peculiar  Necessity  of  Protection  for  the  United 
States.  —  "  But  the  great  argument  for  a  high-  tariff  in 
the  case  of  the  United  States,  is  the  necessity  of  pro- 
tecting our  laborers  against  the  competition  of  the  ill- 

1  I  am  not  sure  that  this  latter  point  is  actually  urged  by  protec- 
tionists ;  but  it  is  obviously  true,  so  far  as  regards  exchange  of  prod- 
ucts with  free-trade  countries.  Suppose  two  countries  have  had  free 
trade  with  each  other  and  one  of  them  imposes  a  protective  tariff ;  the 
first  result  is  to  check  the  movement  of  goods  to  the  protected  coun- 
try, leaving  the  reverse  movement  untouched.  This  leaves  a  balance 
to  be  paid  in  money  by  the  free-trade  country.  The  trade  is  gradually 
restored  to  equilibrium  by  the  consequent  rise  of  prices  in  the  pro- 
tected country  and  a  fall  of  prices  in  the  other,  —  with  the  result  indi- 
cated above.  Of  course,  it  may  be  urged  in  reply  that  the  amount 
gained  in  this  way  is  but  a  small  compensation  for  the  loss  through 
diminished  trade :  and  further,  that  if  all  countries  adopted  protection, 
the  gain  would  disappear. 


356  Political  Economy. 


paid  laborers  of  European  countries.  Here  it  is  common 
to  introduce  statistics  showing  that  wage-rates  in  Great 
Britain  are  very  considerably  below  the  level  of  wages 
paid  in  the  United  States ;  and  that  wage-rates  in  Ger- 
many, France,  Belgium,  and  other  continental  countries, 
are  in  many  industries  not  more  than  half  as  high  as 
those  paid  to  our  laborers. 

"  Now,  if  it  were  not  for  the  tariff,  European  employ- 
ers, getting  laborers  at  such  low  rates  of  wages,  would  be 
able  to  flood  our  markets  with  commodities  of  all  sorts 
at  very  low  prices ;  prices  so  low  in  fact,  that  American 
employers  must  either  give  up  hiring  laborers  altogether, 
or  pay  greatly  reduced  wages.  The  cost  of  transporta- 
tion has  now  been  brought  so  low,  that  the  natural  pro- 
tection formerly  afforded  by  our  distance  from  Europe 
has  practically  disappeared.  European  products  can  now 
be  sold  in  America  at  so  slight  an  advance  over  the  cost 
to  the  European  employer,  that,  without  the  protection  of 
a  tariff,  American  industry  must  at  once  sink  to  the  low 
level  of  wages  and  profits  prevailing  in  Europe.  In  sup- 
port of  this  contention,  the  advocates  of  Protection  cite 
freely  from  the  statistics  of  wages  and  prices  in  European 
countries,  showing  that  in  every  case  the  level  is  below 
ours,  —  except,  of  course,  the  prices  of  those  commodities 
that  are  regularly  exported  from  here  to  Europe. 

"Our  own  home  market  is  the  best  and  only  sure 
market  for  American  products.  Much  the  greater  part 
of  everything  that  we  produce  finds  its  buyers  here.  If 
we  surrender  this  market  to  foreigners,  they  have  noth- 
ing to  tender  us  in  return  that  we  do  not  substantially 
enjoy  already.  To  give  up  our  tariff,  then,  would  be  to 
cut  down  enormously  the  field  for  the  employment  of 
labor  among  us.  Our  most  flourishing  industries  would 
be  instantly  struck  down. 


The  Argument  for  Protection.  357 

"The  doctrine  of  Free  Trade  is  an  English  invention, 
adapted  only  to  further  the  interests  of  British  manufac- 
turers. By  means  of  it  these  hope  to  keep  all  other  coun- 
tries in  industrial  vassalage  to  England.  Every  other 
country  that  has  accepted  the  theory  of  Free  Trade  has 
been  kept  in  backwardness  and  poverty.  Those,  on  the 
other  hand,  that  have  pursued  the  policy  of  Protection, 
have  grown  and  advanced  in  wealth  with  rapid  strides." 

In  support  of  this  view,  protectionist  writers  appeal  to 
economic  history,  giving  statistics  of  decline  in  Free-trade 
countries,  and  of  industrial  growth  wherever  Protection 
has  prevailed.  In  fact,  the  protectionist  argument  runs 
throughout  very  much  in  that  channel.  It  is  largely  an 
appeal  to  facts,  which,  in  the  view  of  the  writers,  go  to 
show  that  Protection  is  either  an  industrial  necessity, 
or  has  proved  itself  in  practice  to  be  a  powerful  agency 
in  building  up  national  prosperity.  This  makes  it  very 
difficult  to  state  the  case  for  Protection  in  brief  form.  It 
is  an  argument  that  does  not  easily  accommodate  itself 
to  abridgement. 

The  favorite  field  from  which  to  draw  proofs  of  the 
beneficent  action  of  Protection,  is  the  record  of  our  own. 
national  growth  under  the  system,  especially  the  growth 
since  the  adoption  of  the  present  tariff. 

FREE   TRADE   REPLY. 

To  these  arguments  the  advocates  of  Free  Trade  reply 
in  substance,  as  follows : 

6.  Feebleness  of  Industries  that  Live  by  Protection.— 

"Differences  in  advanUigus  for  different  kinds  of  produc- 


358  Political  Economy. 

tion  in  a  country  are,  no  doubt,  sometimes  artificial,  but 
they  are  not  usually  so.  The  intelligence  and  enterprise 
of  a  country's  business  men  may  safely,  be  trusted  to 
discover  and  utilize  its  most  favorable  opportunities  for 
the  use  of  capital  and  labor.  If  industry  be  left  without 
interference,  it  will  spontaneously  seek  out  the  most 
productive  channels  for  itself.  The  fundamental  evil  of 
a  protective  tariff  is,  that  it  makes  very  little  attempt 
to  distinguish  the  differences  that  are  artificial  and 
temporary,  from  those  that  are  natural  and  lasting.  It 
invites  men  to  fly  in  the  face  of  nature,  passing  by  the 
better  chance  and  taking  the  worse  one.  This  is  why 
tariff  industries  never  get  beyond  the  need  of  protection ; 
never  are  ready  to  stand  on  their  own  bottom. 

"  If.  as  protectionists  are  apt  to  assume,  the  question 
were  of  giving  temporary  public  aid  in  founding  new 
industries,  which,  once  established,  could  stand  and  flour- 
ish on  their  own  merits,  most  free-traders  would  gladly 
share  the  burden  of  giving  it,  —  whether  by  bounty  or 
by  temporary  tax  on  the  imported  article.  But  the 
question  is  very  rarely  of  that  character.  Men  are  apt 
to  make  the  mistake  of  supposing  that  because  we  have 
reasonably  good  resources  for  the  production  of  a  given 
commodity,  the  producer  of  it  would  need  only  temporary 
protection.  But  it  may  happen  that  our  resources  of 
other  kinds  are  vastly  superior.  In  that  case  temporary 
protection  would  be  of  no  avail ;  the  moment  it  was 
withdrawn,  trade  would  seek  the  easier  way  of  procuring 
the  commodity,  —  namely,  by  giving  our  more  copious 
product  in  exchange  for  it.  For  what  is  called  protec- 
tion against  foreign  competition  is  always,  in  reality, 
protection  against  our  own  better  resources.  Such  pro- 
tection can  never  be  withdrawn  without  the  result  of 


The  Argument  for  Free  Trade.  359 

sending  our  labor  and  capital  back  into  their  most  pro- 
ductive channels.  Witness  the  industries  which  are 
now  still,  after  seventy  years  of  greater  or  less  (usually 
greater)  protection,  as  dependent  on  the  tariff  as  they 
were  at  the  beginning." 

7.  The  Question  of  Demand  for  Labor  and  for  Prod- 
ucts. — "  As  to  causing  increased  demand  for  labor,  stop- 
page of  trade  with  other  countries  can  never  do  that.  It 
only  changes  the  direction  of  the  demand.  In  proportion 
as  you  stop  imports  you  stop  exports  too,  in  the  long 
run.  There  is  as  much  demand  for  labor  to  make  shoes 
to  be  sent  to  Nova  Scotia,  in  exchange  for  potatoes,  as 
there  would  be  to  raise  the  potatoes  at  home.  Further, 
the  rewards  of  labor  depend  on  its  productiveness :  and 
since  interference  with  free  exchange  prevents  us  from 
getting  things  in  the  easiest  way,  it  must  lessen  wages 
and  profits.  Any  rise  of  money-wages  due  to  a  tariff 
is  more  than  offset  by  the  higher  prices  of  most  things 
laborers  have  to  buy. 

"As  to  the  market  for  products  of  labor,  when  a  pro- 
tective tariff  is  first  imposed,  it  does  for  a  little  while 
make  the  sale  of  some  goods  easier,  by  excluding  foreign 
products.  But  herein  it  is  simply  like  an  issue  of  in- 
convertible currency:  the  effect  lasts  only  till  industry 
adjusts  itself  to  the  situation.  Further,  whatever  a 
portion  of  the  community  gain,  even  temporarily,  is  at 
the  expense  of  the  rest.  For,  in  the  example  of  New 
England  and  Nova  Scotia,  the  producers  of  potatoes  in 
Nova  Scotia  and  of  shoes  in  New  England  find  the  mar- 
ket for  their  products  narrowed  by  the  tariff:  what  the 
others  gain  these  lose,  and  much  more  besides. 

"Would  New  England  gain  by  the  exclusion  of  Dakota 
wheat,  or  of  Texas  beef  ?  Nobody  argues  that  free  trade 


360  Political  Economy. 

"between  otif  States  lessens  the  demand  for  labor,  or  for 
products  of  labor,  in  any  part  of  the  Union.  What 
strange  quality  is  it,  in  the  national  boundaries,  that 
makes  free  trade  with  people  living  beyond  them,  so 
injurious  to  the  whole  country?" 

8.  Question   of  Diversified   Employments,  etc.  — "  As  to 
oViversified  industry,  there  is  no  danger  that  any  civilized 
nation  shall  lack  diversity  of  employments.     The  num- 
ber of  commodities  is  many  times  too  great  to  have  any 
whole  country  devoted  to  producing  any  one,  or  even 
any  twenty  of  them.     It  is  mere  absurdity  to  speak  as 
if  the  Whole  population  of  the  United  States  could  in  any 
dase  be  farmers.      Foreign  countries  would  have  no  de- 
mand   for  one-half   of   the   surplus   crop  that  would  be 
raised.     Without  the  tariff,  as  with  it,  we  should  devote 
labor  to  agriculture  only  so  far  as  that  promised  best  re- 
turns.   For  the  rest  we  should  produce  at  home  all  things 
that  we  could  not  obtain  more  cheaply  by  exchange  with 
other  countries.     Prices  would  arrange  themselves  so  as 
to  make  this  certain, 

"As  to  war,  unrestricted  trade  between  countries  is 
the  best  guarantee  for  peace.  It  cultivates  friendly  inter- 
course. Besides,  if  it  would  make  us  dependent  on  our 
neighbors,  it  would  make  them  equally  dependent  on  us." 

9.  Protective  Duties  the  most  Burdensome  Taxes.  —  "So 
far  from  a  protective  tariff  being  a  way  to  obtain  a  rev- 
enue without  taxes,  it  is,  in  fact,  the  most  burdensome 
fbrm  of  taxation.     The.  duties  actually  collected  are  paid 
by  our  own    consumers,  for   no    man   imports  a  foreign 
product  unless  its  price  here  is  enough  above  the  price 
in  the  other  country  to  give  the  importer  a  profit.    With- 
out the  duty  we  should  get  it  at  a  lower  price.     But  the 
real  burden  of  the  tariff  does  not  lie  in  the  taxes  we  pay 


The  Argument  for  Free  Trade.  361 

under  it.  It  deprives  the  people  of  many  times  more 
than  it  gives  to  the  Treasury.  The  real  loss  lies  in  the 
diminished  productiveness  of  our  labor.  The  tariff  closes 
to  us  the  easiest  ways  of  obtaining  many  of  the  things 
we  need,  and  forces  us  upon  harder  ways.  It  leaves  us 
for  our  labor,  fewer  enjoyable  commodities  than  we  might 
have.  The  loss  it  inflicts  is  therefore  not  measurable.  It 
is  precisely  such  a  loss  as  we  should  suffer  if  we  were 
forbidden  to  cultivate  our  most  fertile  lands,  to  work 
our  most  productive  mines,  or  to  use  our  most  effective 
machinery. 

"  Suppose  we  had  two  areas  of  land,  on  one  of  which 
a  given  number  of  laborers  could  raise  250,000  barrels  of 
potatoes,  and  on  the  other  300,000  barrels.  What  should 
we  think  of  a  law  that  should  forbid  the  use  of  the 
better  area?  What  should  we  answer  if  it  were  said  in 
justification  of  the  injury,  that  the  poorer  land  could 
probably  be  made  more  productive  than  the  other  by 
improvements  in  agriculture  ?  —  or  that  it  would,  at  all 
events,  give  more  employment  to  labor  than  the  other  ? " 

10.  The  Tariff  and  Wages.  —  "  On  the  great  question  of 
wages,  and  competition  with  the  pauper  labor  of  Europe, 
the  free-trader's  answer  is  that  wages  in  the  United 
States  will  depend  on  the  general  law  of  wages,  whether 
we  have  a  tariff  or  not.  Without  the  tariff,  as  with  it, 
our  capitalists  would  seek  to  make  profits  by  employing 
labor.  The  tariff  can  only  alter  the  direction  in  which 
labor  shall  be  employed,  and,  as  already  pointed  out,  it 
alters  it  for  the  worse. 

"  It  is  a  fundamental  error  to  suppose  that  the  laborers 
of  two  exchanging  countries  are  in  competition  with  each 
other.  The  only  way  in  which  the  pauper  laborers  of 
Europe  can  lower  wages  in  America,  is  by  coming  over 


362  Political  Economy. 


here  to  compete  in  our  labor  market.  While  they  stay 
at  home,  the  more  cheaply  they  and  their  employers  pro- 
duce commodities  for  us,  the  better  it  is  for  all  classes 
of  Americans, — hired  laborers  as  well  as  others.  If  they 
stood  ready  to  sell  us  their  products  for  one-tenth  of  the 
prices  they  are  likely  to  demand,  the  only  effect  would 
be  to  increase  greatly  the  returns  for  capital  and  labor 
here.  It  would  simply  be  for  us  like  a  labor-saving 
improvement,  that  should  enormously  cheapen  those 
commodities. 

"This  suggests  the  central  fallacy  of  the  whole  pro- 
tectionist argument  on  this  head.  It  takes  for  granted 
that  Europe  would  overstock  our  markets  with  all  com- 
modities, —  forgetting  that  she  would  expect  products 
of  ours  in  return.  The  freest  trade  could  only  result  in 
a  simple  exchange  of  certain  products  of  American  labor 
for  certain  products  of  European  labor ;  and  it  is  mere 
absurdity  to  allege  that  we  should  suffer  injury  by  get- 
ting large  quantities  of  Europe's  products  for  small  quan- 
tities of  our  own.  It  would  be  for  Europe  to  complain 
in  that  case,  not  for  us."1 

The  facts  appealed  to  in  support  of  Protection  have 
been  frequently  traversed  by  free-trade  writers.  These 
explain  and  interpret  the  facts  differently,  —  maintaining 
that  the  advocates  of  Protection  make  the  mistake  of 
attributing  all  the  good  that  happens  where  Protection 
exists,  to  Protection,  and  all  the  evil  where  Free  Trade 
exists,  to  Free  Trade.  The  recent  'great  development  of 

1  The  complaint  of  European  protectionists  is,  in  fact,  the  reverse 
of  this,  —  namely  that  American  products  are  too  cheap.  In  spite  of 
the  high  wages  prevailing  here,  France  and  Germany  have  imposed 
protective  duties  on  American  products. 


Protection  and  Free  Trade.  363 

the  United  States,  for  example,  these  writers  attribute 
to  the  splendid  natural  resources  of  the  country,  and  to 
the  great  improvements  in  production  and  transportation 
that  have  come  into  use  in  the  last  thirty  years.  Of  those 
resources  and  improvements,  they  hold,  we  should  have 
had  even  fuller  advantage,  had  not  the  tariff  hampered 
us  in  the  most  effective  ways  of  using  them. 

The  advocates  of  Protection  characterize  the  whole 
argument  for  Free  Trade  as  a  mere  setting  up  of  abstract 
theories  in  opposition  to  plain  and  visible  facts.  Their 
own  view  they  assert  to  be  that  of  practical  men,  familiar 
with  the  actual  affairs  and  business  necessities  of  the 
country. 

The  advocates  of  Free  Trade  allege  that  the  argument 
for  Protection  is  based  on  a  defective  and  fallacious  view 
of  the  facts;  that  it  persistently  overlooks  quite  half  of 
the  case,  and  by  resting  too  much  on  superficial  and 
variable  matters,  such  as  the  value  of  money  in  different 
countries,  loses  itself  in  a  tangled  web  of  mere  sophistry 
and  self-deception. 

With  this  brief  outline  of  the  arguments  on  each  side, 
I  leave  the  reader  to  sift  and  examine  the  contending 
claims  for  himself.  The  problem  may  seem  highly  com- 
plicated, but  it  is  really  not  more  so  than  most  other 
questions  in  practical  economics.  A  little  careful  think- 
ing, using  the  light  of  first  principles,  can  hardly  fail  to 
lead  to  a  just  judgment  upon  the  merits  of  these  rival 
plans  for  promoting  the  general  wealth. 


CHAPTER    XXVII. 

.CONCLUDING    SUGGESTIONS    ON    VARIOUS    TOPICS. 

WE  have  now  touched,  in  one  form  or  another,  on  all 
the  leading  principles  of  economic  theory.  The  more 
extended  study  of  the  subject  consists  mainly  in  ampli- 
fying these  principles,  in  tracing  out  more  fully  their 
relations  to  each  other,  and  in  considering  the  modifi- 
cations to  which  they  are  subject  in  different  states  of 
society,  and  under  different  social  and  political  institu- 
tions. 

By  way  of  assisting  the  student  in  gaining  a  compre- 
hensive grasp  of  the  whole  subject,  up  to  the  point  we 
have  reached,  the  following  notes,  suggestions,  and  prac- 
tical applications  are  appended:  — 

1,  Particular  and  General  Cases.  —  Many  of  the  more 
common  slips  in  reasoning  about  economic  subjects,  arise 
from  failure  to  observe  the  difference  between  things  that 
are  universally  true  and  things  that  are  true  only  in 
limited  cases.  By  way  of  help  towards  guarding  against 
such  slips,  a  careful  study  of  the  following  truths  is 
recommended : 

A.  Things  possible  in  limited  cases  but  quite  im- 
possible universally,— 

1.  Any  one  commodity,  or  any  limited  number  of 
commodities,  may  rise  or  fall  in  value  at  any  time ;  but 
364 


Particular  and  General  Oases.  365 

it  is  quite  impossible  for  all  commodities  to  rise  or  fall 
in  value  simultaneously.  If  some  rise,  others  fall. 

2.  Any  one  commodity,  or  any  limited  number  of  com- 
modities, may  be  produced  in  excess  of  the  demand  at 
any  time ;  but  it  is  quite  impossible  that  all  products 
should  be  in  excess  of  the  demand  at  one  and  the  same 
time.  If  the  supply  of  some  things  be  excessive,  the 
supply  of  other  things  is  deficient  to  the  same  extent. 

These  two  propositions  are  intimately  connected  with 
each  other.  The  only  evidence  of  overproduction,  in  any 
case,  is  a  fall  in  the  value  of  the  product.  Since  all 
things  cannot  fall  in  value  simultaneously,  there  can  be 
no  simultaneous  overproduction  of  all  things.  There 
can,  however,  be  a  general  fall  of  prices ;  and  the  situa- 
tion that  brings  it  may  have  all  the  awkward  features 
that  would  attend  general  overproduction.  But  it  is 
highly  important  to  keep  in  mind  the  fact  that  gold 
is  a  product  of  labor,  and  that  a  fall  of  prices  is  due  to 
a  deficient  supply  of  this  particular  product.  The  use  of 
money  is  so  peculiar,  and  the  opportunities  for  producing 
it  are  so  limited,  that  one  is  apt  to  leave  it  out  of  view 
as  a  product  of  labor.  A  general  fall  of  prices  is  in  fact  a 
call  for  more  money ;  just  as  a  rise  in  the  value  of  iron 
is  a  call  for  more  iron.  (See  pages  137-140.) 

Eernembering  that  buying  and  selling  are  at  bottom 
exchanging  of  products,  it  is  easy  to  see  that  supply 
of  one  thing  is  demand  for  other  things.  Supply  and 
demand  are  therefore  simply  opposite  views  of  the  things 
offeree!  for  sale,  Do  not,  then,  make  the  mistake  of  look- 


366  Political  Economy. 

ing  at  one  side  only ;  of  looking,  for  example,  at  the 
farmer's  supply  of  wheat,  and  forgetting  his  demand  for 
the  things  he  wishes  to  get  in  exchange  for  his  wheat. 

3.  Some  men  may  gain  by  a  general  rise  of  prices; 
but  it  is  quite  impossible  for  all  men  to  gain  in  that  way. 
What  some  gain,  others  lose. 

B.  Things  always  possible  in  limited  cases,  but  not 
possible  universally  unless  special  conditions  be  fulfilled, — 

There  are  many  of  these ;  and  they  are  the  source  of 
most  of  the  economic  fallacies  that  prevail  in  the  world 
in  relation  to  wages,  profits,  prices,  and  the  like.  In 
dealing  with  questions  relating  to  these  subjects,  we  have 
to  be  very  careful  to  distinguish  the  two  sets  of  cases. 
The  following  examples  illustrate  the  point: 

1.  The  price  of  any  one  commodity  or  group  of  com- 
modities may  rise  or  fall  at  any  time,  by  reason  of  some 
circumstance  peculiar  to  the  commodity  itself  or  to  the 
group  of  commodities.     But  it  is  impossible  for  all  com- 
modities to  rise  or  fall  in   price  simultaneously,  unless 
there  be  a  change  either  in  the  supply  of  money,  or  in 
the  quantity  of  goods  to  be  sold  (the  productiveness  of 
industry). 

2.  Money-wages  in  any  one  industry,  or  group  of  in- 
dustries, may  rise  or  fall  at  any  time  for  reasons  pecu- 
liar to  the  industry  or  group  of  industries  affected.     But 
it  is  impossible  for  money -wages  to  rise  or  fall  in  all  in- 
dustries simultaneously,  unless  there  be  a  change  either 
in  the  volume  of    money-savings  or  in  the  number  of 
laborers  to  be  hired. 


Particular  and  General  Cases.  367 

3.  A  tax  on  any  one  commodity  causes  its  value  and 
price  to  rise ;  but  an  equal  tax  on  all  products,  including 
gold,  would  not  raise  the  value,  or  the  price,  of  any.     It 
would  simply  lessen  the  rewards  of  producers.     [Every 
tax  on  commodities  has  this  latter  effect,  whether  it  acts 
through,  or  without,  change    of   values.      Compare    the 
opposite  case  of  improvements,  page  106.] 

4.  If  the  laborers  should  begin  to  abandon  coal-mining, 
wages  in  that  industry  would  have  to  be  advanced,  and 
the  price  of  coal  would  rise ;  but  an  equal  rise  of  wages 
in  all  industries  would  not  be  attended  by  a  general  rise 
of  prices.     There  would  be  a  general  fall  of  profits.     Sim- 
ilarly, a  fall  of  wages  in  any  one  industry,  owing  to  a 
greater   inclination   of   the   laborers    to   enter   it,  would 
bring  a  fall  in  the  value  and  price  of  the  product;  but 
a  general  fall  of  wages  would  riot  cause  a  general  fall  of 
prices.     It  would   only  cause  a  general   rise  of   profits. 
[The  change  of  wages,  in  these  cases,  is  not  the  cause 
of  the  change  of  value.     Both  changes  are  effects  of  the 
changed  conduct  of  the  laborers.     See  page  97.] 

The  reason  why  the  single  case  is  so  different  from 
the  general  case  is  easily  seen.  In  economics,  as  in  other 
tilings,  results  must  have  adequate  causes :  you  cannot 
make  something  out  of  nothing.  If  there  be  a  regiment 
to  feed,  and  only  a  certain  quantity  of  bread  and  meat 
to  do  it  with  each  day,  everybody  sees  at  once  that 
the  average  share  cannot  exceed  a  certain  amount.  Any 
one  company  may  have  its  allowance  enlarged ;  but  in 
that  case  we  readily  see  that  the  allowance  to  other 


368  Political  Economy. 

companies  has  to  be  diminished.  Yet  one  is  liable  to 
argue  about  wages,  prices,  and  such  subjects,  as  if  there 
could  be  a  general  rise  at  any  time,  without  any  addi- 
tional means  for  maintaining  the  rise. 

No  doubt  there  is  an  elastic  quality  in  the  agencies 
that  set  the  level  of  wages  and  prices.  There  is  always 
a  reserve  of  savings  awaiting  investment,  of  goods  await- 
ing sale,  of  money  awaiting  expenditure,  and  of  laborers 
seeking  employment.  In  a  loosely  organized  society, 
such  as  goes  with  individual  liberty,  these  reserves  are 
to  a  large  extent  necessary,  and  where  not  necessary  they 
are  unavoidable.  The  existence  of  them,  and  the  possi- 
bility of  increasing  or  diminishing  them,  makes  the  action 
of  economic  principles  less  sharp  and  sudden  than  it 
would  otherwise  be.  By  drawing  on,  or  adding  to,  these 
reserves,  a  temporary  effect  may  be  obtained  at  seeming 
variance  with  the  general  principle.  The  general  level 
of  prices  may  be  raised  somewhat  for  a  time,  without 
increase  of  money,  on  the  simple  condition  of  adding  to 
the  unsold  stock.  Wages  may  be  temporarily  raised  at 
any  time,  without  increase  of  saving,  simply  by  drawing 
on  the  ordinary  reserve  of  savings,  or  by  adding  to  the 
number  of  laborers  out  of  employment.  There  is,  in  fact, 
no  limit  to  the  prices  sellers  might  ask,  nor  to  the  wages 
laborers  might  demand.  The  difficulty  comes  in  selling 
the  whole  product  at  prices  too  high  to  match  the  exist- 
ing supply  of  money,  and  in  finding  employment  for  all 
laborers  at  wages  too  high  to  match  the  current  flow 
of  savings. 


Economic  Principles  require,  Time.  36*9 

2.  Slow  Working  of  Economic  Principles.  —  The  point 
just  considered  is  a  good  illustration  of  a  general-  truth 
which  the  student  must  always  keep  in  mind,  —  namely, 
that  economic  principles  take  time  to  work  themselve's 
out.  They  are  only  certain  to  prevail  in  the  long  ruii. 
They  have  at  any  given  moment  very  little  of  the  char- 
acter of  physical  laws,  which  assert  themselves  irresisti- 
bly in  every  case.  They  are  rather  principles :  of  human 
action,  true  of  men  in  the  average  so  r  long : 'as  they  act 
intelligently.  What  we  call  the  law  of  prices,  for  exam- 
ple, operates  mainly  as  an.  argument  presented  to  the 
minds  of  those  who  have  tilings  to  sell,  or  wish  td'r  buy. 
The  argument  is  weak  at  first  and  may  be-  thrust  aside ; 
but  the  longer  it  is  resisted,  the  stronger  it  grows.  u  In 
the  long  run  men  find  resistance  to  be  a  source1 -of  loss, 
and  we  assume  that  for  their  own  advantage  they  will 
yield. 

Every  result  that  depends  on  competition  niust  have 
the  requisite  time  to  work  itself  out;  and  the  less  mobile, 
the  elements  in  the  case,  the  longer  the  time  necessary. 
For  example,  the  values  of  commodities  that  require  long 
time  for  their  production  are  slower  to  conform  to  their 
cost  than  the  values  of  commodities  that  are  quickly 
made.  Again,  prices  of  things  are  much  slower  to  fail 
when  the  situation  requires  a  fall,  than  they  are  to 
rise  when  the  situation  warrants  a  rise.  Everybody  who 
has  invested  savings,  counting  on  the  old  prices,  re 
pledged  to  resist  a  fall.  Undertakings  that  require  ex- 
tensive machinery  or  other  fixed  capital,  —  railroads,  for 


370  Political  Economy. 

example, — are  slower  to  have  their  profits  brought  to 
the  common  level,  than  undertakings  that  require  but 
little  outlay.  This  is  especially  true  where,  as  in  the 
case  of  railroads  between  most  towns,  only  one  such 
establishment  is  needed.  If  two  be  built  there  is  not 
traffic  enough  to  keep  both  fully  employed,  and  the  con- 
sequence is  a  "war  of  rates,"  which  means  total  loss  of 
earnings  for  both  roads.  Competition  acts  smoothly  and 
effectively  only  when  there  is  room  for  several  competi- 
tors. As  the  country  grows  and  business  increases,  it  can 
hardly  be  doubted  that  competition  will,  in  the  long  run, 
assert  its  force  in  railroad  earnings  as  in  other  things. 

3,  Temporary  and  Permanent  Eesults.  —  Because  econ- 
omic principles  take  time  to  work  themselves  out,  it  is 
essential  for  the  student  of  economics  to  distinguish,  in 
many  cases,  between  temporary  or  immediate  effects  and 
the  permanent  results.  We  have  had  occasion  to  note 
a  good  many  examples  of  this.  Artificial  interference 
with  the  natural  progress  or  tendency  of  industry,  is 
very  apt  to  have  an  ultimate  effect  very  different  from 
that  at  the  outset. 

(1)  A  tax  suddenly  imposed  on  the  production  or  im- 
portation   of   any   commodity   would   give,   temporarily, 
high  profits  to  those  having  stocks  of   the  article     but 
the  high  gains  would  not  continue. 

(2)  A  strike,  in  favoring  circumstances,  may  extort  a 
rise  of  wages  in  any  industry ;    but  if   wages  were  pre- 
viously as  high  as  competition  tended  to  make  them,  the 
rise  cannot  be  maintained. 


Temporary  and  Permanent  E/ects.  371 

(3)  An   increase   of  the  demand  for  any  commodity 
raises  the  value  temporarily,  and  with  it  the  wages  and 
profits  of  the  producers ;  but  the  permanent  effect  is  to 
cause  increased   production  of  the   commodity,  without 
any  excess  of  gains  over  those  made  in  other  industries. 
The  converse  is  true  in  the  case  of  diminished  demand 
for  an  article. 

(4)  The  temporary  effect  of  increasing  the  supply  of 
money  in  a  country  may  be  to  lower  the  rate  of  interest ; 
also  to  quicken  the  sales  of  goods.     But  the  permanent 
effect  is  only  to  lower  the  value  of  money,  —  that  is,  to 
cause  a  rise  of  prices  (and  money-wages).     The  rate  of 
interest   and   the    difficulties   of    trade    return   to   their 
normal  condition. 

(5)  The  temporary  effect  of  increase  in  the  number  of 
laborers  is  to  lower  the  rate  of  wages.     The  effect  in  the 
long  run  may  only  be  to  cause  a  proportional  increase  of 
savings,  through  increasing  the  product  of  industry.     A 
constant  addition  has,  however,  the  constant  result  of  keep- 
ing wages  somewhat  lower  than  they  would  otherwise  be. 

(6)  A  tariff  on  imports  may  have  the  temporary  effect 
of  causing  high  profits  in  the  production  of  things  pre- 
viously obtained  by  foreign  trade,  and  low  profits  in  the 
production   of   exports.      In   the   long  run,   competition 
diverts  capital  and  labor  from  the  production  of  exports 
to  the   production    of  things   formerly  obtained  by  ex- 
change with   other   countries ;    and  profits  in  the  tariff 
industries  are  brought  to  the  same  level  as  profits  in  the 
other  industries. 


372  Political  Economy. 

I  (7)  Similarly  when  duties  are  abolished,  tariff  indus- 
tries are  temporarily  depressed,  and  other  industries  have 
their  gains  increased.  But  the  effect  in  the  long  run  is 
to  divert  capital  and  labor  from  the  production  of  things 
previously  excluded  by  the  tariff,  to  the  production  of 
things  to  be  exported  in  return  for  the  new  imports. 

4.  Relation  of  Wages  to  Product,  Prices,  etc.  —  No  part 
of  economic  theory  presents  so  many  points  of  difficulty 
as  that  which  relates  to  wages,  especially  to  the  source 
and  consequences  of  changes  in  wages.  The  subject  is 
so  important  that  the  student  ought  to  spare  no  pains  in 
order  to  gain  clear  views  regarding  it.  A  careful  study 
of  the  following  cases  can  hardly  fail  to  be  of  service  in 
clearing  up  the  relations  of  wages  to  profits,  prices,  and 
the  productiveness  of  industry. 

Changes  in  the  general  level  of  individual  wages 
present  themselves,  in  practice,  in  one  or  other  of  the 
following  forms : 

Case  I.  A  change  of  money-wages,  with  a  correspond- 
ing change  of  prices. 

Case  II.  A  change  of  money-wages,  without  a  corre- 
sponding change  of  prices. 

Case  III.  A  change  of  prices,  without  a  corresponding 
change  of  money- wages. 

Now  it  is  evident,  from  the  principles  stated  in  the 
foregoing  chapters,  that  four  different  elements  come  into 
play  at  any  given  time,  in  fixing  the  scale  of  money- 
wages  and  the  general  level  of  prices,  namely : 

1.   The  number  of  laborers. 


Wages  in  a   Growing  Community.  373 

, • 

2.  The  total  volume  of  commodities  produced. 

3.  The  supply  of  money. 

4.  The  strength  of  the  spirit  of  saving. 

Each  of  these  elements  is  liable  to  change.  The 
fourth, , no  doubt,  changes  but  slowly,  since  it  depends  on 
the  general  character  and  temperament  of  men,  —  things 
which  are  not  subject  to  violent  fluctuations.  But,  in 
every  growing  country,  the  other  three  are  constantly 
expanding.  Every  increase  of  population,  every  indus- 
trial improvement,  every  change  in  the  supply  of  gold 
or  in  the  use  of  substitutes  for  it,  may  have  an  effect, 
temporary  or  lasting,  on  the  earnings  of  the  individual 
laborer.  Assuming  the  fourth  element  to  be  constant, 
the  course  of  wages  depends  on  the  relative  rate  of  in- 
crease of  the  other  three.  Of  course,  if  the  three  expand 
equally,  there  is  (on  the  assumption  named)  no  effect  on 
individual  wages,  money  or  real.  But  the  three  may 
not,  and  in  fact  usually  do  not,  expand  equally.  There 
are  three  representative  cases : 

A.  All  three  expanding,  but  the  supply  of  money  not 
increasing  at  the  same  rate  as  the  number  of  laborers 
and  the  volume  of  products  (the  two  latter  increasing 
equally) ;  the^  general  level  of  prices  rises  or  falls,  with 
a  corresponding  change  of  money-wages ;  no  necessary 
change  of  rear  wages,  nor  of  profits.  [Case  I.  above.] 
There  may,  however,  be  temporary  effects  of  no  small 
importance,  owing  to  the  difficulty  of  readjusting  the 
scale  of  money-wages  and  of  prices,  so  as  to  conform  to 
the  changed  (relative)  supply  of  money.  (See  Chapter 
XIIL,  §§  9  and  10.) 


374  Political  Economy. 

m 

B.  All  three  increasing,  but  the  number  of  laborers 
not  increasing  at  the  same  rate  as  the  volume  of  products 
and  the  supply  of  money  (the  two  latter  expanding 
equally) ;  the  general  level  of  prices  remains  unchanged, 
but  wages  (both  money  and  real)  and  profits  rise  or 
fall.  If  the  increase  of  products  and  money  be  more 
rapid  than  the  increase  of  laborers,  the  first  effect  is 
a  rise  of  profits;  each  employer  has  more  goods  to  sell 
than  before  (in  proportion  to  the  number  of  laborers  he 
employs),  and  there  is  no  fall  of  value  to  offset  the  in- 
crease of  quantity.  The  general  rise  of  profits  may 
be  counted  on  to  cause  increase  of  savings,  and  thus  to 
carry  the  greater  part,  or  even  the  whole,  of  the  increased 
product  to  wages.  These  are  the  effects  of  all  general 
improvements  in  the  arts  of  production,  such  as  the  in- 
vention of  the  steam-engine ;  also,  of  every  increase 
in  the  personal  efficiency  of  the  laborers  in  all  industries. 
Both  money  and  commodities  become  more  plentiful,  in 
comparison  with  the  number  of  laborers :  each  man  has 
more  money  and  more  good  things  for  his  labor.  If,  on 
the  other  hand,  the  increase  of  products  and  money  be 
less  rapid  than  the  increase  of  laborers,  the  first  effect 
is  a  decline  of  profits  and  this  is  followed  by  a  falling-off 
in  savings,  —  thus  throwing  a  part,  or  even  all,  of  the 
loss  on  wages.  [Case  II.  above.]  If  the  decrease  of 
product  be  due  to  the  necessity  of  pressing  some  classes 
of  natural  agents  beyond  their  point  of  maximum  return, 
there  is  a  rise  of  some  prices,  and  a  fall  of  others,  the 
general  level  remaining  the  same;  and  rents  rise. 


Wages  in  a   Growing  Community.  375 

C.  All  three  increasing,  but  the  volume  of  products 
not  increasing  at  the  same  rate  as  the  number  of  laborers 
and  the  supply  of  money :  money-wages  remain  the  same, 
but  prices  rise  or  fall  and  real  wages  and  profits  fall  or 
rise.     Though  each  man,  whether  laborer  or  employer, 
gets  the  same  money-income  as  before,  his  income  reck- 
oned in  things  is  different.     In  this  case  the  change  of 
real  wages  is  direct  and  automatic ;  that  is  to  say,  it  is 
not  brought  about  through  an  antecedent  effect  on  profits. 
When  any  of  the  things  laborers  consume  are  reduced 
in  price,  whether  by  improvements  in  production  or  by 
the  opening  of  trade  with  other  regions,  the  result  is  an 
immediate  rise  of  real  wages.     Further,  the  rise  is  per- 
manent, unless  by  more  rapid  increase  of  numbers,  the 
advantage  be  in  part  or  wholly  transferred  to  the  em- 
ployers.    The  opposite  result  follows  a  rise  of  price  of 
any  of  the  things  consumed  by  laborers,  —  whether  the 
rise  be  due  to  increased  cost  of  production,  or  to  the 
cutting-off  of  trade  with  other  communities.     [Case  III. 
above.]     The    differences    between    this    case    and    the 
second,  arise  from  the  fact  that  here  the  laborer's  earn- 
ing power,  measured  in  money,  does  not  change,  whereas 
in  the  other  case  it  does.     The  second  case  relates  to 
universal  changes  in  the  productiveness  of  labor;   this 
one  to  changes  in  particular  industries   other  than  the 
production  of  gold.     As  already  pointed  out  (page  107), 
the  course  of  affairs,  in  practice,  presents  a  combination 
of  the  two  cases. 

D.  If   now  the  general   disposition   to   save  becomes 


376  Political  Economy. 

stronger,  each  of  the  foregoing  cases  becomes  modified 
iii:  favor  of  wages  and  against  profits.  First  of  all,  where 
population,  product,  and  money  increase  equally,  the 
more  strenuous  saying  causes  a  rise  of  individual  wages 
(both;  money  and  real) /arid  a  fall  of  profits,  —  giving,  for 
tlwe.  laborer  the  $ame  ^effect  as  the  first  alternative  under 
M.  In  A.  money- wages  rise  more  than  prices,  or  do  not 
fall  so  much:  real  wages  rise  and  profits  decline.  In  B. 
eaefo  man's,  wages  (money  and  real)  rise  more  than  his 
product  increases,  or  fall  less  than  it  decreases.  In  0. 
m0n§y- wages  rise,  and  real  wages  rise  more  than  propor- 
tipnallyito  the  increase  of  individual  product,  or  fall  less 
than  the  product  falls  off.  In  every  case  the  advantage 
gained  by  the  laborers,  through  increase  of  the  disposi- 
tion to  ;save,  is  gained  at  the  expense  of  the  employers' 
profits.  ; 

5.  The  Question  of  an  Eight-hour  Law.  — r  It  is  of  the 
highest  importance  ,  in  the  •  discussion  of  practical  cases, 
to  distinguish  changes  of  wages  that  are  at  the  expense  of 
pitftfitg. from,  those  that  are  not  so.  In  such  a  question  as 
that  of  the  proposed  eight-hour  law,  for  example,  every- 
thing turns  on  the  effect  a  reduction  of  hours  would  have 
oir  the  Volume  of  product.  If  in  eight  hours  the  laborers 
produce  as  much  as  they  now  produce  in  ten 
the  change  is  in  every  way  desirable;  it  may  be 
ma;dq  without  lass-  of  wages,  or  'profits.  If,  however, 
t]ie]  reduction  of  hours  means  a  reduction  of  product  also, 
it  involves  a  fall  of  profits,  or  of  wages,  or  both.  The 
question,  as  to  the  product,  is  one  of  fact,  which  economic 


Proposed  Eight-hour  Law.  377 

theory  cannot  decide.  But  we  may  safely  lay  down  the 
principle  that  a  diminution  of  individual  product  implies 
an  inevitable  reduction  of  individual  rewards. 

The  reduction  of  hours,  it  is  true,  seems  to  be  contem- 
plated only  for  certain  classes  of  city  laborers ;  and  the 
expectation  may  be  that  the  decline  of  product  in  the 
eight-hour  industries  would  be  made  good  to  the  employ- 
ers by  a  rise  of  the  value.  This  is,  of  course,  conceivable ; 
but  it  is  not  therefore  practicable.  The  result  would 
obviously  be  to  favor  particular  classes  of  laborers  at 
the  expense  of  the  rest  of  the  community.  To  maintain 
the  favored  classes  in  the  enjoyment  of  higher  wages  for 
a  day  of  eight  hours,  than  other  equally  good  laborers 
are  getting  for  a  day  of  ten  or  even  twelve  hours,  would 
require  that  we  should,  in  some  way,  give  them  a  strict 
monopoly  of  the  work.  Otherwise  competition  would, 
in  the  long  run,  bring  wages  to  correspond  with  the 
quantity  of  labor. 

QUESTIONS  AND  EXERCISES. 

1.  Explain   the  process  by  •  which  exports  of  merchandise  are 
made  to  pay  for  imports. 

2.  When  a  country  exports  more  than  she  imports,  what  is  the 
effect  on  the  rate  of  exchange,  and  why  ? 

3.  How  are  exports  and  imports  kept  roughly  equal  in  money 
value  (or  aggregate  price)  ? 

4.  Show  that  money-wages  may  differ  more,  in  two  exchanging 
countries,  then  the  general  level  of  prices  can  differ. 

5.  Explain    carefully   the   statement   that    international    trade 
arises  from  differences  in  the  comparative  cost  of  producing  the 
articles  exchanged. 


378  Political  Economy. 

6.  Can  differences  in  the  general  level  of  wages  in  two  coun- 
tries cause  a  trade  between  them? 

7.  Show  that  the  cost  to  a  country  of  its  imports  is  the  cost  of 
producing  its  exports. 

8.  Suppose  labor   became   twice  as  productive  as  it  is,  in  all 
our  industries,  what  would  the  effect  be  on  the  cost  to  us  of  our 
imports?    Would  the  change  cause  us  to  export  or  import  any 
articles  not  now  exported  or  imported  ? 

9.  There  are  two  countries,  A  and  B.     Each  of  them  produces 
at  home  its  whole  supply  of  wheat  and  cloth,  and  the  prices  in 
each  are  as  follows  : 

In  A  wheat  is  $1.50  a. bushel;  cloth,  $1.00  a  yard. 

In  B  wheat  is  $0.80  a  bushel ;  cloth,  $1.00  a  yard. 

If  now  trade  be  opened  between  them,  what  course  will  it  prob- 
ably take  ?  What  will  determine  the  international  value  of  wheat 
and  cloth  ?  Does  it  follow  that  the  production  of  either  wheat  or 
cloth  will  be  wholly  abandoned  in  either  country? 

10.  There  are  two  countries,  C  and  D,  which  have  had  no  trade 
with  each  other.     Prices  and  money-wages  differ  as  follows : 

In  C  wheat  is  $2.00  a  bushel;  cloth,  $1.50  a  yard;  coal,  $8.00 
a  ton ;  shoes,  $6.00  a  pair ;  wages,  $3.00  a  day. 

In  D  wheat  is  $1.00  a  bushel;  cloth,  $0.75  a  yard;  coal,  $4.00 
a  ton ;  shoes,  $3.00  a  pair ;  wages,  $2.00  a  day. 

If  trade  be  opened  between  them,  what  will  be  the  probable 
course  of  affairs?  [Cost  of  transportation:  wheat,  10  cents  a 
bushel ;  cloth,  1  cent  a  yard ;  coal,  $1.50  a  ton ;  shoes,  2  cents 
a  pair.] 

11.  If  in  the  preceding  example,  the  price  of  wheat  in  C  had 
been  $1.00  instead  of  $2.00,  what  difference  would  this  make  as 
regards  the  course  of  the  trade? 

12.  When  a  high  tariff  is  adopted  in  a  country,  explain  care- 
fully the  effect  on  the  industries  producing  exports.     Give,  step 
by  step,  the  process  by  which,  in  such  a  case,  exports  and  imports 
are  restored  to  equality. 


Questions  and  Exercises.  379 

13.  Do  the  same  for  the  case  of  a  country  in  which  duties  on 
imports  are  reduced  or  abolished. 

14.  Taking  the  facts  given  in  question  10,  as  representative  of 
the  general  character  of  the  two  countries,  C  and  D,  which  of  them 
is  best  for  a  laborer  to  live  in  ? 

15.  Why  does  not  cost  of  production   regulate  the  values  of 
commodities  in  trade  between  countries  ?     Why  does  it  do  so  in 
any  trade  ? 

16.  Does  the  importation  of  goods  lessen  the  market  for  the 
products  of  home  labor  in  a  country? 

17.  What  are  the  chief  sources  of  difference  in  the  comparative 
cost  of  commodities  in  different  countries  ? 

18.  England  buys  of  us  annually  about  twice  as  much  as  we 
buy  of  her.     [For  1888  the  figures  were  three  hundred  and  eight 
millions  against  one  hundred  and  fifty  millions  of  doHars'  worth.] 
How  do  you  reconcile  this  fact  with  the  general  principle  of  trade 
between  countries? 

19  Show  that  the  abolition  of  our  tariff  would  probably  be 
followed  by  a  rise  in  the  value  of  money  in  this  country  (i.  e.,  by 
a  fall  of  prices). 

20.  Would  all  prices  be  likely  to  fall  equally  in  that  case  ? 
Would  the  price  of  wheat,  for  example,  fall  as  much  as  the  price 
of  steel-rails,  or  of  cloth  ? 

21.  Would  money-wages  be  likely  to  fall  in  the  same  ratio  as 
the  general  level,  or  average,  of  prices? 

22.  Show  that  foreign   products  might  be  excluded  from  our 
markets  by  means  of  duties  on  our  exports.     Show  also  how  the 
situation   would   differ   from  that   in   which   the   exclusion   was 
brought  about  by  prohibitory  duties  on  imports. 

23.  If  you  had  the  power  of  adding  ten  per  cent,  to  the  wealth 
of  the  country,  should   you  make  the  increase  in  money,  or  in. 
other  things?     If  in  money,  would  it  be  likely  to  remain  with  us? 

24.  Would  the  addition  of  a  hundred  millions  to  the  coin  in 
general  circulation  in  the  world,  differ  in  effect  from  an  equal 
extension  of  bank  currency? 


380  Political  Economy. 

25.  Why  is  demand  for  commodities  not  a  demand  for  labor? 
Is  it  so  in  any  case? 

26.  How  does  the  use  of  Prison  Labor  in  production  affect  the 
interests  of  free  laborers? 

27.  Why  are  the  wages  of  women  lower  than  the  wages  of  men? 

28.  What  is  the  fallacy  of  the  doctrine  that  wages  are  paid  out 
of  the  product  of  the  labor  they  reward  ? 

29.  In  what  forms  do  changes  of  real  wages  present  themselves  ? 
In  what  precise  form  do  hired  laborers  receive  benefit  from  rail- 
roads ?  from  increased  personal  efficiency  on  their  own  part  in  all 
industries?  from  lessened  cost  of  producing  clothing  and  fuel? 

30.  Mention  cases  in  which  the  permanent  result  of  economic 
changes  differs  from  the  temporary  result. 

Si.  Give  examples  illustrating  the  statement  that  "  many  things 
are  always  possible  in  every  case  singly,  which  are  never  possible 
universally,  unless  some  special  condition  be  fulfilled." 

32.  Suppose  the  present  owner  of  every  hired  house  in  New 
York,  should  make  a  present  of  it  to  the  tenant,  would  house- 
rents  fall  in  the  city? 

33.  A  man  mortgages  his  farm  as  security  for  a  loan  wherewith 
to  build  a  mill.     Supposing  the  farm  and  the  mill  to  be  taxed  at 
their  full  value,,  ought  the.  mortgage  to  be  taxed  also?     Is  the 
general  wealth  greater  than  it  would  be  if  the  lender  had  built 
the  mill  himself? 

34.  Show  that  a  special  tax  on  all  farms,  or  on  farm  products, 
must  fall  on  the  consumers;  but  a  tax  on  the  economic  rent  of 
land,  falls  on  the  land-owners  alone. 

35.  If  a  special  tax  were  suddenly  imposed  on  the  rent  of  land, 
show  that  it  would  be  a  practical  confiscation  of  a  portion  of  the 
wealth  of  the  present  owners.     Would  future  purchasers  l>e  bur- 
dened by  such  a  tax?     [Remember  how  the  price  of  land  is  fixed.] 

36.  Show  that  the  proposed  Single  Tax  on  land,  in  order  to  be 
just,  must  be  confined  to  th**  increase  of  rent  after  the  tax  is 
imposed. 


APPENDIX. 


THE  TARIFF  ON  IMPORTS. 

THERE  is  much  discussion  of  the  Tariff,  but  most  persons  have 
very  little  knowledge  as  to  the  precise  rates  of  duty  it  imposes. 
The  whole  document  is  much  too  complicated  and  too  long  to  be 
given  in  full  here.  The  following  abstract  and  statistics  may  be 
of  service  to  those  who  desire  to  get  a  general  view  of  the  subject. 
It  will  be  observed  that  the  duties  on  some  articles  is  specific 
({.  e.,  so  much  a  pound,  gallon,  etc.)  ;  on  others  ad  valorem  (i.  e.,  at 
a  given  rate  per  cent,  on  the  value),  and  on  still  others  an  ad  val- 
orem rate  is  levied  in  addition  to  a  specific  duty  [see,  for  example, 
manufactures  of  wool].  In  not  a  few  cases  the  duty  on  some 
grades  of  a  commodity  is  specific,  and  on  other  grades  ad  valorem. 

The  following  t&ble  is  compiled  from  the  official  report  of  the 
Bureau  of  Statistics  of  Foreign  Commerce,  for  the  year  1888.  In 
the  case  of  articles  subject  to  a  simple  ad  valorem  duty,  the  rate  is 
given  in  the  last  column.  When  the  duty  is  specific,  or  a  com- 
bination of  specific  and  ad  valorem  rates,  the  character  of  the  duty 
is  noted  in  the  first  column ;  in  such  cases  the  figures  in  the  last 
column  indicate  the  proportion  the  duty  actually  collected  bore  to 
the  value  of  the  goods.  The  average  rate  on  all  dutiable  goods 
imported  during  the  year  was  nearly  46  per  cent. 

It  is  to  be  noted  that  about  one-third,  by  value,  of  all  the  articles 
imported,  come  in  free  of  duty.  The  leading  article  on  the  free 
list  is  coffee.  The  five  next  in  order  are  chemicals,  hides,  raw  silk, 
India-rubber,  and  tea.  These  six  articles  constitute  two-thirds  of 
the  whole  free  importation. 

381 


382 


Appendix. 


ARTICLES. 

The  amount  of 
duty  actually 
collected. 

sf  * 

Ml 

EDUCATIONAL   REQUISITES. 

Books,  maps,  etc  

$721,255 

6,828 

25 
20 

"       writing,  blank  books  and  envelopes  . 

225,731 

25 

Type-metal  (20  per  cent.),  type  (25  per  cent.)  . 

30,698 

20 

Ink  

30,290 

30 

Pens,  12  cents  a  gross         

61,240 

44 

Penholders       

9,774 

30 

Pencils,  50  cents  a  gross,  and  30  per  cent,  ad  val- 
orem in  addition       .        .        . 

58,479 

56 

Penknives,  pocket  knives,  etc  

773,029 

50 

Scientific  apparatus  and  instruments    . 

13,478 

35 

Musical  instruments    

456,964 

25 

Works  of  art  

'      432,406 

30 

Soap,  15  cents  a  pound,  or  20  per  cent,  ad  valorem 

139,511 

29 

MANUFACTURES   OF    COTTON. 

Thread,  10  cents  to  48  cents  per  pound 

436,704 

46 

Spools,  7  cents  a  dozen       

59,820 

57 

Cloth,  unbleached,  2£  to  4  cents  per  square  yard 

45,742 

46 

"      bleached,  3£  to  5  cents  per  square  yard  . 

393,586 

50 

"       printed,  4|  to  6  cents  per  square  yard  . 

1,145,279 

43 

Stockings  and  other  knit  goods,  35  and  40  per  ct. 

2,608,435 

39 

Ready-made  clothing  (cotton)         . 

133,559 

35 

Appendix. 


383 


ARTICLES. 

The  amount  of 
duty  actually 
collected. 

3j 

l"% 

!jl 

i*« 

WOOL   AND   ARTICLES   PARTLY    OR   WHOLLY    MANU- 

FACTURED  OF   WOOL. 

Wool  for  clothing,  value  under  30  cents  per  pound 

unwashed,  10  cents  per  pound 

$1,612,637 

48 

"      washed,  20  cents  per  pound  .... 

129,509 

60 

"      scoured,  30  cents  per  pound     . 

40,485 

72 

Value  over  30  cents  per  pound.     - 

"     unwashed,  12  cents  per  pound      . 

4,458 

37 

"     washed,  24  cents  per  pound     .        . 

1,341 

61 

"     scoured,  36  cents  per  pound     . 

1,144 

85 

Combing  wools,  unsecured,  10  cents  per  pound    . 

553,513 

42 

"      scoured,  30  cents  per  pound    . 

7,396 

58 

Carpet  wools,  value  under  12  cents  per  pound 

unsecured,  2£  cents  per  pound 

1,367,600 

25 

"       scoured,  7|  cents  per  pound 

28,877 

43 

Value  over  12  cents  per  pound. 

"       unsecured,  ^5  cents  per  pound 

981,028 

28 

"       scoured,  15  cents  per  pound   . 

519 

52 

Blankets,  10  to  35  cents  per  pound,  and  35  to  40 
per  cent,  in  addition     

5,068 

70 

Flannels,  10  to  35  cents  per  pound,  and  35  or  40 
per  cent,  in  addition     

460,252 

70 

Stockings  and  other  knit  goods,  same  rates  of  duty 
as  flannels     .                       .... 

1,072,167 

62 

Woolen  and  worsted  yarns,  (same  rates) 

1,363,373 

68 

Woolen  shawls,  35  or  40  cents  per  pound,  and  35 
or  40  per  cent,  in  addition        .... 

632,569 

65 

384 


Appendix. 


ARTICLES. 

The  amount  of 
duty  actually 
collected. 

|J 

J—     <4-< 
0    O 

Ready-made  clothing  (woolen  or  partly  wool)  40 
or  45  cents  per  pound,  and  35  or  40  per  cent. 
ad  valorem,  in  addition     ,         .        .        . 

$822,847 

59 

Cloth,  cheaper  grades,  35  cents  per  lb.,  and  35  per  ct. 

983,395 

92 

Cloth,  better  grades,  35  cents  per  lb.,  and  40  per  ct. 

6,747,138 

69 

Dress  goods,  part  wool,  cheaper  grades,  5  cents 
a  square  yard,  and  35  per  cent.       . 

2,893,679 

68 

Ditto,  better  grades,  7  cents,  a  sq.  yard,  40  per  ct. 

2,125,022 

59 

Dress  goods,  all  wool,  cheaper  grades,  9  cents  a 
square  yard,  and  40  per  cent,  ad  valorem. 

6,603,535 

84 

Dress  goods,  same,  better  grades,  35  cents  per 
pound,  and  40  per  cent,  ad  valorem 

2,120,260 

70 

MISCELLANEOUS. 

16,383,371 

50 

Coal,  75  cents  per  ton     -        

665,786 

22 

Lumber,    boards,    shingles,  laths,    etc.,  various 
rates,  specific  and  ad  valorem  .... 

1,686,658 

18 

Lime     • 

9,292 

10 

Nails,  1£  to  4  cents  per  pound         .         . 

9,118 

79 

Screws,  6  to  12  cents  per  pound 

2,017 

54  . 

Handsaws         

9,184 

40 

Files,  35  cents  to  $2.50  a  dozen  .... 

39,279 

60 

Window-glass,  common,  Ifto2£  cents  per  pound 

1,563,512 

113 

"          "      plate,  3  to  50  cents  per  square  foot 

1,127,147 

90 

Paints,  various  rates  from  8  to  173  per  cent. 

411,964 

33 

Oil,  flaxseed  or  linseed,  25  cents  per  gallon   . 

1,855 

54 

Crockery  and  china,  various  rates,  from  20  to  60 
per  cent  „        . 

3,531,467 

58 

Carpets,  hemp,  6  cents  per  square  yard     . 

14,977 

25 

Appendix. 


385 


ARTICLES. 

The  amount  of 
duty  actually 
collected. 

Rate  per  cent, 
on  the  value 
of  goods. 

Oil-cloth  for  floors   

$133,309 

40 

Woolen  carpets,  or  partly  woolen,  40  per  cent,  or 
8  to  45  cents  per  square  yard  and  30  per  cent. 

651,579 

47* 

Cutlery         

228,740 

35 

Sugar,  1J  to  3£  cents  per  pound     .... 

50,649,760 

80 

Molasses,  4  and  8  cents  per  gallon     . 

1,347,327 

26 

Salt,  8  and  12  cents  per  100  pounds 

552,788 

54 

Starch,  2  and  2|  cents  per  pound 

154,076 

96 

Potatoes,  15  cents  per  bushel         .... 

1,239,369 

34 

Rice,  2J  cents  per  pound     .        . 

1,109,187 

113 

Fish,  cured,  various  rates        

645,652 

21 

Iron  ores,  75  cents  per  ton          .... 

693,501 

38 

Pig-iron,  $6.72  per  ton     

2,189,435 

43 

Scrap  iron,  $6.72  per  ton     

1,052,035 

49 

Steel-rails,  $17  per  ton     

2,630,347 

75 

Structural  iron,  1£  cents  per  pound    . 
Cotton  ties       

187,827 
181,637 

104 
35 

Machinery  (iron  and  steel),  45  per  cent.    . 
Jewelry    

936,033 
i  QO  04°, 

45 
25 

Precious  stones  (except  diamonds  which  are  on 
the  free  list)      ....... 

lOwjVxO 

1,052,966 

10 

Tobacco,  35,  40,  and  75  cents  per  pound   . 

5,886,289 

66 

Cigars,  $2.50  per  pound,  and  25  per  cent,  in  ad- 
dition   . 

q  ficq  -MA 

1AQ 

Ale  and  beer,  20  cents  a  gallon,  35  cents  bottled 

O,OOt7,  i^\J 

666,666 

xuo 
49 

Whiskey,  brandy,  and  other  spirits,  $2  a  gallon 
Wines,  various  rates       

2,987,824 
4,019,717 

153 
55 

386 


Appendix, 


SUMMARY. 

The  following  table  shows  the  amount  of  duty  collected  on  the 
leading  classes  of  dutiable  imports  in  the  year  ending  June  30, 
1888,  and  the  proportion  of  the  duty  to  the  value  of  the  goods:  — 


ARTICLES. 

Duty  collected. 

Percentage  of 
value. 

Sugar  and  molasses         .        ... 

$52,007,980 

75 

4,729,486 

34 

Manufactures  of  wool     

32,213,120 

68 

Iron  ore,  pig  and  scrap 

2,882,886 

42 

Manufactures  of  iron  and  steel       .... 

18,391,246 

42 

Flax,  hemp,  jute,  etc.,  raw  

2,388,002 

14 

Manufactures  of  flax       .... 

7,914,093 

34 

Silk,  manufactures  of          

16,351,685 

50 

Cotton,  manufactures  of         .        .        . 

11,491,897 

40 

4,477,535 

29 

Chemicals,  drugs,  dyes,  etc  

4,622,442 

36 

Tobacco  and  cigars,  etc  

9,734,987 

79 

Leather,  and  manufactures  of        .... 

3,479,249 

30 

Wines  and  liquors       

7,663,244 

72 

Wood,  boards,  shingles,  and   other   "manufac- 
tures "of  

1,684,998 

18 

Glass  and  glass-ware    

4,799,252 

62 

Fancy  articles         

3,022,742 

42 

Breadstuffs  

1,115,811 

14 

Earthen,  stone,  and  china-ware      .... 

3,568,277 

57 

Hats,  bonnets,  and  materials  for        ... 

1,241,915 

22 

Animals   

932,370 

20 

All  other  dutiable  articles  

13,816,591 

19 

TOTAL    

$213,509,801 

46 

Appendix.  387 


INTERNAL,  REVENUE. 

THE  internal  revenue  of  the  United  States  is  derived  from 
excise  duties  on  the  production  and  sale  of  whiskey  and  other 
distilled  spirits,  beer  and  ale,  tobacco,  cigars  and  cigarettes,  and 
oleomargarine.  The  rates  of  duty  and  the  amount  of  revenue 
derived  therefrom,  are  as  follows :  — 

Whiskey  and  other  spirits,  90  cents  a  gallon      .        .        .  $69,306,166 

Beer  and  ale,  $1  per  barrel 23,324,218 

Tobacco  and  snuff,  8  cents  per  pound         ....  16,749,009 

Cigars,  30  cents  a  hundred 11,534,180 

Cigarettes,  5  cents  a  hundred 931,363 

Special  tax  on  manufacturers  and  dealers       .        .        .  1,447,880 

Oleomargarine,  2  cents  per  pound,  and  license  fee     .        .  864,140 

Other  itemc  (chiefly  penalties) 169,519 

TOTAL $124,326,475 


NOTE  ON  THE  ANALYSIS  or  COST  OF  PRODUCTION. 

THE  reasons  which  lead  me  to  name  "Waiting,"  instead  of 
"  Abstinence,"  as  an  element  in  the  cost  of  producing  things,  are 
briefly  as  follows  :  — 

1.  It  is  desirable  to  have  a  definition  that  applies  to  all  produc- 
tion, under  whatever  circumstances.     Abstinence  is  not  a  univer- 
sal and  necessary  sacrifice  in  production.     It  is  strictly  applicable 
only  to  industry  carried  on  by  hired  labor. 

2.  Production  must  have  preceded  abstinence.    The  first  wealth 
abstained  from  had  a  cost  of  production  in  which   abstinence 
surely  formed  no  part. 

3.  It  is  desirable  to  disentangle  cost  of  production  wholly  from 
questions  of  wages.    Now  abstinence  is  intimately  connected  with 
wages.     The  laborer's  wages  give  the  measure  of  the  employer's 
abstinence.    If,  other  things  remaining  unchanged,  wages  rise,  the 
employer  must  submit  to  increased  abstinence  in  order  to  obtain 


388  Appendix. 


a  given  product.  If  wages  fall,  the  reverse  is  true.  If  now  we  say 
that  abstinence  enters  into  cost  of  production,  we  are  bound  to 
say  that  cost  of  production  varies  with  mere  changes  of  wages. 

4.  Cost  of  production,  as  distinct  from  what  economists  have 
usually  called  "  cost  of  labor,"  is  a  question  between  men  on  one 
side,  and  the  materials  and  forces  of  nature  on  the  other.     It  is 
a  question  of  the  total  exertion  or  sacrifice  necessary  on  men's 
part  in  order  to  obtain  the  products  they  need.     Nature  demands 
only  labor  without  immediate   enjoyable   result;    or,  as  I  have 
ventured  to  express  it,  labor  and  waiting.     How  men  shall  carry 
or  share  these  burdens,  is  a  question  between  men  themselves ;  it 
belongs,  as  already  suggested,  to  the  region  of  wages  and  profits, 
and  not  to  production  as  such. 

5.  The  abstinence  of  the  employing  class  may  be  regarded  as 
an  element  in  what  I  have  ventured  to  call  the  "  employer's  cost." 
It  is  a  sacrifice  made  with  a  view  to  profit,  rather  than  with  a  view 
to  production,  pure  and  simple.     Abstinence  is  an  element  in  the 
cost  of  profits,  not  in  the  cost  of  production. 

6.  The  substitution  of  Waiting  for  Abstinence  brings  out  more 
clearly  the  whole  cost  of  production  under  division  of  labor, — 
since   it   enables   us   to  take   account  of  the  time  required  for 
exchanging  the  finished  products.     It  lays  the  basis  for  exhibit- 
ing', more  clearly  than  was  easily  possible  under  the  old  definition, 
the  true  relation  of  wages  to  the  economic  cost  of  products.     It 
supplies  the  economic  answer  to  those  who   assert  that  labor  is 
the  whole  burden  of  production.     In  a  word,  it  corresponds  with 
the  observable  facts  of  the  case. 

7.  Finally,  the  proposed  change  of  definition  lays  the  basis  for 
a  better  treatment  of   wages.     It  enables  us  to  connect  wages 
directly  with  savings,  and  to  avoid  the  confusion  that  arises  from 
failing  to  distinguish  between  savings  (which  are  necessary  only 
for  paying  wages)  and  the  working  capital  which  is  a  necessity 
of  production. 


INDEX. 


THE   NUMBERS    REFER    TO   PAGES. 


Abstinence,  a  part  of  the  cost  to 
employers,  but  not  of  the  true 
cost  of  production,  75,  94,  269, 
387. 

Bank  currency,  150. 

Bills  of  exchange,  324. 

Bimetallism,  177. 

Buying  and  selling,  the  separated 
halves  of  economic  exchange, 
26;  buying  easier  than  sell- 
ing, 28. 

Capital,  three  forms  of,  59;  is 
consumed,  63;  fixed  and  cir- 
culating, 64;  the  capital  *of 
to-day  a  legacy,  65 ;  represents 
improvements,  66,  70;  how 
created,  66,  76;  owned  by  a 
few,  72 ;  how  related  to  sav- 
ings, 68,  74  ;  cost  of,  255. 

Competition,  in  selling,  89 ;  tends 
to  equality  of  rewards,  105, 
215,  226;  erroneous  view  of, 
216;  combinations  to  defeat, 
118,  231,  266;  obstructed  in 
its  action,  113,  217,  229. 


Cost,  to  the  employer,  92,  254- 
266,  269;  true  or  economic 
cost,  94,  104,  and  appendix 
note ;  cost  in  both  senses, 
made  up  of  many  small  parts, 
102;  difficulty  of  analyzing, 
104 ;  economic  cost  governs 
natural  value,  105 ;  lessened 
by  improvements,  106;  does 
not  include  risk,  108 :  relation 
of  to  international  value,  332 ; 
sources  of  difference  in  com- 
parative cost,  343. 

Demand  and  supply,  action  of  in 
fixing  market  value,  89;  de- 
mand for  commodities  not  a 
demand  for  labor,  237;  de- 
mand for  commodities  not  les- 
sened by  saving,  239. 

Deposits  (bank)  as  currency,  151. 

Diminishing  returns,  law  of,  294 ; 
consequences  of,  310. 

Division  of  labor,  advantages  of, 
18;  makes  exchange  neces- 
sary, 22  ;  how  men  know  what 
to  produce  under,  105. 

389 


390 


Index. 


Double  standard,  167. 

Dull  times,  nature  of,  138,  164. 

Employers,  function  of,  73 ;  prof- 
its of,  see  Profits ;  not  respon- 
sible for  low  wages  of  women, 
224 ;  employer's  cost,  92,  254, 
269,  387. 

Exchange  of  products  made  ne- 
cessary by  division  of  labor, 
22 ;  obscured  by  use  of  money, 
26  ;  carried  on  by  traders,  28 ; 
complicated  with  payment  of 
wages,  33,  133,  139,  164,  238, 
241 ;  must  keep  pace  with  pro- 
duction, 88,  128;  exchange 
between  nations,  323. 

Exports,  pay  for  imports,  325, 
and  tend  to  equality  with,  328. 

Free  Trade  and  Protection,  349. 

Gold,  nominal  and  real  demand 
and  supply  of,  142;  uses  of, 
143 ;  has  no  price,  145 ;  pro- 
duction of,  145 ;  profits  of  gold- 
mining  affected  by  changes  of 
prices,  146,  note ;  how  the  care- 
ful keeping  of  the  precious 
metals  affects  their  value,  147 ; 
questions  between  gold  and 
silver,  166 ;  gold  standard,  170 ; 
movements  of  gold  between 
countries,  chap.  xxv. 

Improvements  in  production, 
effect  of  on  values,  106;  on 
wages  and  profits,  107,  373; 


agricultural    improvements, 

301. 

Inconvertible  notes,  182. 
Interest,  196,  259,  270. 
International  trade,  323. 
Inventors,  importance  of,  71. 

Labor,  as  an  element  in  cost  of 
production,  95 ;  cost  of  differs 
to  different  employers,  257 ; 
division  of,  18;  productive 
labor,  52;  productiveness  of, 
54 ;  non-productive  labor,  53, 
226,  320 ;  prison  labor,  248. 

Laborers,  classes  of,  214;  may 
raise  wages  by  increased  effi- 
ciency, 233,  235,  374 ;  not  ben- 
efited by  those  who  buy  goods, 
236;  constitute  a  market  for 
all  they  can  produce,  238. 

Land,  grades  of,  44 ;  rent  of,  288; 
city  rents,  306 ;  why  price  of 
land  so  variable,  309. 

Legal  tender  notes,  154, 156 ;  in- 
convertible,  183. 

Materials,  a  form  of  capital,  60. 

Money,  the  struggle  for,  17 ;  uses 
of,  25 ;  value  of,  122 ;  circula- 
tion of,  124,  130;  two  func- 
tions of,  133  ;  nominal  and  real 
demand  and  supply  of,  127, 
142 ;  value  of  differs  in  differ- 
ent countries,  94,  329. 

Money-wages,  123, 198, 372 ;  scale 
of  important  only  in  relation  to 
prices,  34,  197,  235;  differ  in 
different  countries,  336. 


Index. 


391 


Natural  wealth,  40 ;  law  of  value 

of,  46, 109.    See  also  Rent  and 

Land. 
Natural  value,   105;  of  money, 

123. 
Normal  wages  and  profits,  203, 

224. 

Overproduction  possible  in  sin- 
gle commodities,  78,  262,  but 
not  in  all,  138,  248,  365. 

Particular  and  general  cases,  364. 

Population,  effects  of  growth  of, 
46,  289 ;  checks  on  increase  of, 
314 ;  ultimate  limits  of,  317. 

Price,  how  distinguished  from 
value,  86;  how  the  general 
level  of  prices  is  fixed,  127, 
142 ;  prices  in  international 
trade,  94,  328. 

Prison  labor,  production  by,  not 
injurious  to  free  laborers,  248. 

Production,  nature  of,  41, 52,  94 ; 
requisites  for,  58  ;  in  progress, 
62. 

Productiveness  of  labor,  54 ;  re- 
lation of  to  wages,  199,  225, 
310,  374. 

Profits,  nature  of  195;  normal, 
203 ;  rate  of,  hard  to  discover, 
208 ;  profits  may  become  wages, 
211,  236;  profits  of  individual 
employers,  251. 

Protection  and  free  trade,  349. 

Questions  and  exercises,  35,  83, 
120,  192,  321,  377. 


Rent,  286-309;  rents  may  be- 
come wages,  319. 

Risk,  an  element  in  employer's 
cost,  78,  262 ;  but  not  in  eco- 
nomic cost,  108. 

Savings,  relation  of  to  capital, 
75 ;  to  wages,  76,  197,  373 ;  to 
the  rate  of  profits,  201,  225: 
not  increased  by  strikes,  233 ; 
increase  of  saving  does  not 
lessen  demand  for  goods,  239 ; 
replacement  of  savings  ex- 
pended, 209,  211. 

Selling,  difficulties  of,  28  ;  these 
not  due  to  scarcity  of  money, 
190;  profit  and  loss  by  sales, 
260. 

Silver,  convenience  of,  165 ;  de- 
cline of  value,  172  ;  silver  cer- 
tificates, 154,  158  note,  176 
note;  our  currency  approach- 
ing the  silver  standard,  173 ; 
the  silver  in  the  Treasury  not 
a  reserve,  176.  See  also  gold. 

Skilled  labor,  products  of,  113; 
wages  of,  220. 

Slow  working  of  economic  prin- 
ciples, 369. 

Strikes,  232. 

Supply  and  demand,  89 ;  in  the 
case  of  money,  124 ;  supply  of 
one  thing  demand  for  other 
things,  365. 

Tariff,  on  imports,  381. 
Temporary  and    permanent  re- 
sults, 370. 


392 


Index. 


Trusts,  118,  266. 

Value,  86 ;  connection  with  cost 
of  production,  101,  105;  how 
affected  by  improvements,  106, 
375;  value  of  natural  wealth, 
109  ;  of  products  of  skill,  112  ; 
of  things  having  a  joint  cost, 
115  ;  governed  by  cost  of  most 
costly  part,  296;  relation  of 
value  to  rent,  298;  interna- 
tional values,  115, 337 ;  general 
rise  or  fall  of  values  impos- 
sible, 87,  248,  365;  value  not 
an  attribute  of  all  wealth,  46, 
252  note;  increase  in  value  of 
natural  wealth  not  a  general 
gain,  50. 

Wages,  industrial  consequences 
of,  77 ;  principles  governing 
aggregate  wages,  194;  individ- 
ual wages,  212 ;  equalizing  ten- 
dency of  competition,  215; 
normal  and  market  wages,  203, 
224 ;  relation  of  wages  to 
product,  196;  not  found  by 
deducting  profits  from  the 
product,  211;  raised  by  im- 


provements, 106,  374 ;  but  not 
*»by  strikes,  232 ;  not  lowered 
by  production  in  prisons,  248; 
wages  and  the  circulation  of 
money,  133,  198,  241;  real 
wages  depend  on  the  relation 
of  money-wages  to  prices,  34, 
198,  235,  372;  high  profits 
favorable  to  high  wages,  235, 
374;  free  spending  is  not  so, 
236;  wages  advanced  out  of 
savings,  75,  242  ;  extent  of  the 
advance,  245  ;  fallacy  of  deny- 
ing the  advance,  247;  wages 
of  women,  223;  of  non-pro- 
ductive laborers,  226;  wages 
differ  in  different  countries, 
220;  these  differences  not  a 
cause  of  international  trade, 
345.  See  also  Money-wages. 
Wealth,  defined,  36;  natural 
wealth  and  wealth  produced 
by  labor,  39 ;  how  natural 
wealth  acquires  value,  43,  109  ; 
production  of  wealth,  41,  52; 
value  of,  86. 

Waiting,  an  element  in  cost  of 
production,  72,  95,  99,  387. 


TJHITBESIT7 


U     OU  I 


